Early amortization of loan: is it better to reduce quota or term?

Let’s imagine that we need extra financing and they grant us a € 10,000 credit at 5 years, with an interest of 10% APR. This means that for 60 months we will pay a total loan of € 212.47, so we will end up paying the bank € 12,748. But what would happen if our company pays us an unexpected bonus or we won a lottery prize of 3,000 euros? If we decide to use this money to amortize the loan that we have in force in advance, we will have the following two options.

1. Reduce the loan fee

We can reach an agreement with the bank to reduce the loan and so we can pay less per month, which perhaps suits us to save more in our day today. If we choose this option it will mean that we will continue paying for 5 years but with a lower monthly payment:

The fee would go from € 212.47 to € 148.73
The total would change from € 12,748 to € 11,924
So we would save 7%

2. Reduce the term of the credit

We will also have the option of speaking with the entity that manages the loan to allow us to reduce its term, so we would maintain approximately the same quota but for many fewer months- cost of borrowing. For example, if they accept our proposal we could go from returning the loan in 5 years to doing it in 3:

The fee would go from € 212.47 to € 225.87

The total would change from € 12,748 to € 11,131

So we would save 14.5%

Some conclusions

After these examples, we can draw some conclusions about whether it is better to repay loans with a reduced or shorter installment in advance:

It is better to reduce the term of the loan since it can suppose the double of saving that reduce the quota.
Reducing the term of the credit will not only allow us to save money but also the risk of default. That is to say, we will avoid possible contingencies that could affect the repayment of the loan that we have in force, for example, if in the next few years we run out of income, the bank conditions change, etc.

We will have to find a balance so as not to amortize so much that we run out of savings to deal with possible unforeseen events or to avoid paying so much a month that in the end, we will end up suffocating from day to day.
The greater the debt or the greater the capital that we can advance, the greater the savings. For example, in mortgages savings can reach 5 figures.

If we suspect that we can pay before the deadline, we must choose credits with zero cancellation commission, or free early amortization, as with the ING Orange Loan, or the mini-credits Kredito24, Pepedinero.com.

After knowing the possibilities we have if we get extra financing and we want to amortize the repayment of the loan that we have in force, we can only decide what is best for us taking into account our financial profile and our priorities.