What Is a Paydown?
A paydown is a reduction in a company’s, government’s, or consumer’s overall debt. It’s common in business to issue a new round of corporate bonds at a lower price than the previous one. As a result, the company’s debt load is reduced. A paydown is when a consumer makes a greater payment on a mortgage, car loan, credit card, or any other type of debt in order to reduce the outstanding principal.
Example of a Consumer Paydown
Making extra principal payments toward a mortgage is a common example of a consumer paydown.
Assume a homeowner has 20 years of payments left on a $300,000, 30-year mortgage with a 5% interest rate. Their monthly payment will be around $1,610 (principal and interest).
If they put an extra $100 toward principal each month, they would save $15,250 over the life of the loan and pay it off nearly two years sooner.
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