Why do customers save money if they pay off a closed ended loan faster than the amortization table requires?

Question

Responses

Customers can renegotiate the terms of the loan any time.

It does not since the terms of the loan are defined in the table.

Paying more of the principal reduces the amount of interest due.

A closed ended loan has standard payments that include the principal.

Answer 1

The correct response is:

Paying more of the principal reduces the amount of interest due.

When customers pay off a closed-ended loan faster than the scheduled payments, they are effectively reducing the principal balance more quickly. Since interest is calculated on the remaining principal, lowering that balance means that less interest will accrue over time. As a result, customers save money in total interest paid over the life of the loan.