U.S. CitiesCity-Data Forum Index
Go Back   City-Data Forum > General Forums > Economics
 [Register]
Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
View detailed profile (Advanced) or search
site with Google Custom Search

Search Forums  (Advanced)
Reply Start New Thread
 
Old 05-20-2013, 11:47 AM
 
Location: California
243 posts, read 908,720 times
Reputation: 107

Advertisements

Not sure about this one and I need help.

I recently purchased a new car and am making monthly payments if $275/mo to my bank. For the past few months I have always added an extra few $$. $ 25, $50, etc. Then about a week after my 4th payment, I made a payment ( all have been online) for $500 toward the principal.

When I checked my loan balance, I noticed that my balance did not drop by $500, but by $457. They kept $43 and applied it toward interest. Keep in mind I just had made a payment, all payments have been on time and my account said nothing was due. To me this should have taken $500 off the principal.

I called my bank and they informed me of 2 things.
1. Their online system does not accept online payments for principal only. I would need to mail in a check and ask that it be applied toward the principal. The online system is a courtesy, no charge system. They could provide no docs telling me this is how their online system works.

2. My contract states that when a payment is made, the interest has to get paid first. As it was about 13 days since my last payment and the $500 payment, the $43 held makes % sense. However, can legally have the right to do this and is this hurting me in the end? Again, their system told me my payment due was zero.



Thank you!
Reply With Quote Quick reply to this message

 
Old 05-20-2013, 12:22 PM
 
Location: TX
795 posts, read 1,184,389 times
Reputation: 782
Yes they can do this.

This won't hurt you - the reality of the situation is, you're trying to hurt them and they're just not letting you.

They accepted the loan because you agreed to pay them as directed. Now you are going against that, and this screws with their amortization schedules.

Just pay as directed.
Reply With Quote Quick reply to this message
 
Old 05-20-2013, 03:29 PM
 
1,263 posts, read 2,643,743 times
Reputation: 1872
That's often how extra payments are applied: accrued interest first. Unless your loan contract prohibits it, it's fine to make additional principal payments whenever you want. Principal payment is different than early payment, as you've discovered...

When making a principal payment, it's best to send a check or pay at a branch in person. Make sure the check is labeled "Principal Payment Only" on the memo line, and point it out to the teller (or in the letter you mail with the check). Get a receipt or written acknowledgement that the principal payment was applied to principal only.

Yes, it will throw the amortization schedule off, but that doesn't matter. When you've paid it off you've paid it off. Amortization schedules always end up a bit off unless every single payment is applied on the exact day it's due.

FYI - I was a loan officer for many years and spent a decade in banking.
Reply With Quote Quick reply to this message
 
Old 05-21-2013, 10:36 AM
 
Location: California
243 posts, read 908,720 times
Reputation: 107
Appreciate the help!
Reply With Quote Quick reply to this message
 
Old 05-21-2013, 10:41 AM
 
Location: home state of Myrtle Beach!
6,233 posts, read 18,119,501 times
Reputation: 3419
It used to be with some loans that early payoff wasn't an option. If it was a 60 month loan, they expected the payments every month for 60 months; nothing more or nothing less! I don't know if the loan industry has quit offering this option as I no longer buy cars on loan.
Reply With Quote Quick reply to this message
 
Old 05-21-2013, 11:40 AM
 
Location: West Orange, NJ
12,542 posts, read 17,725,661 times
Reputation: 3681
this is how it works with numerous loans. You must jump through hoops to make an "extra" payment that is applied to principal only. what you'll likely see is that in their eyes, you made next month's payment ahead of time. Some will hold your payment and not apply it until the next due date, so consider yourself lucky they didn't do that and you at least got an immediate principle reduction. In the future, follow their stupid methods to making extra payments...it costs them more money to process those mailed in payments, so it's their loss.
Reply With Quote Quick reply to this message
 
Old 05-21-2013, 12:37 PM
 
4,328 posts, read 4,425,337 times
Reputation: 3308
Quote:
Originally Posted by ShakyJ View Post
Not sure about this one and I need help.

I recently purchased a new car and am making monthly payments if $275/mo to my bank. For the past few months I have always added an extra few $$. $ 25, $50, etc. Then about a week after my 4th payment, I made a payment ( all have been online) for $500 toward the principal.

When I checked my loan balance, I noticed that my balance did not drop by $500, but by $457. They kept $43 and applied it toward interest. Keep in mind I just had made a payment, all payments have been on time and my account said nothing was due. To me this should have taken $500 off the principal.

I called my bank and they informed me of 2 things.
1. Their online system does not accept online payments for principal only. I would need to mail in a check and ask that it be applied toward the principal. The online system is a courtesy, no charge system. They could provide no docs telling me this is how their online system works.

2. My contract states that when a payment is made, the interest has to get paid first. As it was about 13 days since my last payment and the $500 payment, the $43 held makes % sense. However, can legally have the right to do this and is this hurting me in the end? Again, their system told me my payment due was zero.



Thank you!
I've never seen it done any other way.

For example if my payment is due on the 1st of every month and I also make a payment on the 15th the interest accrued during those 14 days needs to be paid. You will naturally pay less in interest on the 1st of the next month because only 15-16 days of interest has accrued since your last payment.
Reply With Quote Quick reply to this message
 
Old 05-21-2013, 10:46 PM
 
4,174 posts, read 2,782,365 times
Reputation: 2629
The amount of interest you pay each month should be the interest rate times the balance divided by 12 (roughly) - not a penny more! It sounds like the payment you made was treated as an advance payment for your next regularly scheduled payment. And it sounds like the bank rep you called confirmed this. If you send them a check for principle only, you should not be charged interest. Odd they do not allow this to be done online. Seems a method of discouraging you from prepayment of principle.
Reply With Quote Quick reply to this message
 
Old 05-24-2013, 11:50 AM
 
Location: Living on the Coast in Oxnard CA
15,370 posts, read 25,567,363 times
Reputation: 19641
Pay them one time a month. Take the additional money that you are trying to pay them and stick the money in a savings account of some kind. After you pay off your car take the money that you were paying for the car and increase your payment to savings. Pay cash for the next car.
Reply With Quote Quick reply to this message
 
Old 05-24-2013, 01:15 PM
 
4,328 posts, read 4,425,337 times
Reputation: 3308
Quote:
Originally Posted by SOON2BNSURPRISE View Post
Pay them one time a month. Take the additional money that you are trying to pay them and stick the money in a savings account of some kind. After you pay off your car take the money that you were paying for the car and increase your payment to savings. Pay cash for the next car.
This is only the best method if the interest is under 4%. If the interest is 6-8% it makes sense to pay them as often as you can.

If I owe $10,000 at 8% interest and my payment is scheduled for the 1st of the month.

Let's say the loan starts May 1st and my 1st payment is due June 1st.

Let's say my payment is 200 a month.

The interest on that loan accrues at roughly $2.19 a day. So on June 1st I would owe $2.19*31 = $67.95 in interest.

$200-$67.95= $132.05 going to principal

So now I owe $9867.95 and the interest is then recalculated based off of this principal.


If I do 2 payments a month it looks like this.

$200 on May 15th: $2.19*15= $32.88 in interest has accrued.

So on May 15th I now owe: $9832.88

Now I make my second payment on June 1st: Interest is recalculated based off of the new principle, which makes it now $2.15 a day *16 days = $34.48 owed in interest

Another $200 dollars is paid on June 1st: which means now I owe $9667.36


If I make 2 payments that month I pay $32.88+$34.48 = $67.36 in interest over 31 days.

If I make 1 payment a month I pay $67.95 in interest over 31 days. Making the two payments lowers my interest payment by roughly $0.60.

So it may seem like you are paying more, but the interest is always recalculated off of the current principal, so although you pay interest twice when you make 2 payments the total is still less than what the interest would be if you paid it once a month.

The bank always gets the money owed to them first. If you make 2 payments on the same day the second payment would go completely to principal because no interest has accrued. Other than that the accrued interest needs to be paid first.
Reply With Quote Quick reply to this message
Please register to post and access all features of our very popular forum. It is free and quick. Over $68,000 in prizes has already been given out to active posters on our forum. Additional giveaways are planned.

Detailed information about all U.S. cities, counties, and zip codes on our site: City-data.com.


Reply
Please update this thread with any new information or opinions. This open thread is still read by thousands of people, so we encourage all additional points of view.

Quick Reply
Message:

Over $104,000 in prizes was already given out to active posters on our forum and additional giveaways are planned!

Go Back   City-Data Forum > General Forums > Economics
Follow City-Data.com founder on our Forum or

All times are GMT -6.

2005-2018, Advameg, Inc.

City-Data.com - Archive 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16, 17, 18, 19, 20, 21, 22, 23, 24, 25, 26, 27, 28, 29, 30, 31, 32, 33, 34, 35 - Top