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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.
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.
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.
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.
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.
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.
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.
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.
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