# lending.overpayment-effect

What a one-off lump-sum overpayment does to a repayment loan, with both of the
options UK lenders offer shown side by side:

- **Reduce the term**: keep paying the same amount; the loan ends sooner.
  `reducedTermPayments`, `reducedTermFinalPayment`, `reducedTermInterest`,
  and `paymentsSaved`.
- **Reduce the payment**: keep the end date; each payment is recalculated on
  the lower balance over the remaining term. `reducedPayment`,
  `reducedPaymentInterest`.

Both are compared with a baseline: carrying on at the current payment as if
nothing had been overpaid (`baselinePayments`, `baselineInterest`). Interest
saved is baseline minus option. Reducing the term always saves at least as
much interest as reducing the payment, because the balance falls faster;
reducing the payment gives cash-flow room instead. Which to choose is the
borrower's, which is why both are returned.

## Conventions

The overpayment is applied just after a regular payment, to the balance that
payment left, and takes effect from the next period. Every period is built
exactly as in lending.amortisation-schedule: interest on the opening balance
rounded half-up to a whole minor unit, the payment covers interest first, and
the last payment of the term (or the one that would overshoot) is exactly what
is owed, so no option ever ends with a stray penny outstanding.

The baseline and the reduce-the-term option pay the `payment` you pass; it
need not be the level payment (a borrower who already pays extra each month
is modelled by passing what they pay). The reduce-the-payment option
recalculates with lending.loan-payment and your rounding `mode`.

## What it does not do

- Early repayment charges. Many fixed-rate mortgages charge 1-5% of an
  overpayment above an annual allowance (often 10% of the balance); take that
  off before calling, or compare it with the interest saved.
- Overpaying the whole balance. That is an early settlement: the lender's
  settlement figure (for regulated consumer credit, lending.early-settlement)
  is the right tool, so an overpayment of the whole balance is an error.
- Rate changes, daily interest or payment holidays.

## Errors

A payment that does not cover the first period's interest never repays and is
refused. Currencies must match. The rate, frequency and remaining term are
checked as in lending.loan-payment.