Janet made an extra, one-time payment of \$100 on her loan. How does this payment affect the total interest Janet will pay over the life of the loan?

• A. It increases the total interest paid because the payment is considered a penalty.
• B. It decreases the total interest paid because the principal is reduced earlier.
• C. It delays the loan payoff date, increasing the total interest paid.
• D. It has no effect on the total interest paid since only regular payments matter.

Answer: (B)

Verified step by step guidance

1. Understand the concept of loan interest: Interest is calculated based on the principal amount of the loan. When the principal is reduced earlier, the interest accrued over time decreases because the interest is calculated on a smaller remaining balance.
2. Recognize the impact of an extra payment: An extra payment directly reduces the principal amount of the loan. This means that future interest calculations will be based on a lower principal, leading to less total interest paid over the life of the loan.
3. Clarify why the payment does not increase interest: The extra payment is not a penalty; it is applied to the principal, which reduces the loan balance earlier than scheduled. This does not increase the total interest paid.
4. Explain why the loan payoff date is not delayed: An extra payment reduces the principal, which can actually shorten the loan payoff period rather than delaying it. This is because the loan balance decreases faster than planned.
5. Conclude why regular payments are not the only factor: While regular payments are important, extra payments can significantly impact the total interest paid by reducing the principal earlier, which lowers the interest accrued over time.