Those of you who love to double and triple your payments for early payoff ((beware))

[BacktoBasics]

Some of you already know this but I'm seeing enough people that don't so I'm posting it here for you guys.

For the past twenty or so years it was common practice for a bank to automatically send any extra payments or extra amounts directly to principal. Obviously the idea is to get an early payoff and avoid interest.

In the last year and half I've seen nearly all my regular lenders change that practice without noting it anywhere on the contracts or stating otherwise. They do however state that you can pay off your loans early with little to no penalty.

We all know you should be specific with your payments and how they are applied but most underwriters aren't telling you that it has to be done. Especially for those who love to make payments online. Those extra amounts never/rarely go to principal online.

Early...YES but you aren't avoiding the interest unless you specify you want the amount to go directly to principal. So what we have here are a bunch of banks that got smart and are dividing up your extra payments between interest and principal accordingly. This has been going on for awile but I'm just seeing a huge spike lately. This isn't happening to all of my customers even within the same banks, so for some reason they are picking and choosing who gets the shaft and who doesn't with very little to no consistancy.

Banks that have changed in the last year just off the top of my head:

Bank of America
Wells Fargo
G.E. Money Bank
Thor Credit
USAA
U.S. Bank
Bank of the West
Frost
Navy Federal
Navy Army
Gulf Coast Credit Union
Teachers Credit Union

Hope this helps someone from getting screwed out of an early payoff. Just ask your bank for a print out of interest to principal and how it was applied.

[SpursWoman]

On both my car & my mortgage, when I make my payments online there is a specific box to enter any additional principal I want to pay. I've done it, and then positively verified how it was applied on my statements.

I used to have to be very specific on student loan payments, because they would always apply any extra to either a proportionate interest/principal, or just reduce the amount of my next payment due. I was always on the phone with them.

[MannyIsGod]

Thats some serious bullshit. Good post.

[BacktoBasics]

On both my car & my mortgage, when I make my payments online there is a specific box to enter any additional principal I want to pay. I've done it, and then positively verified how it was applied on my statements.

I used to have to be very specific on student loan payments, because they would always apply any extra to either a proportionate interest/principal, or just reduce the amount of my next payment due. I was always on the phone with them.That is fucking awesome I do not have those boxes available for payment options at my bank. I have to do it in person.

[ObiwanGinobili]

:tu Thanks, I'll keep this in mind.
My 1st payment is coming due and I wanted to be paying extra toward it in the middle of every month - off to do some searching.

[Flea]

Wells Fargo also give you the option of paying towards the Principal but you do have to mark it.

[NorCal510]

i have no clue what that is

[Mixability]

i have no clue what that is

It means that if you take out the garbage more often and inform her to apply it to the "principal", you should be able to "pay" your Mom back for the SUV she gave you sooner.

[NorCal510]

still dont understand

[JoeChalupa]

On both my car & my mortgage, when I make my payments online there is a specific box to enter any additional principal I want to pay. I've done it, and then positively verified how it was applied on my statements.

I used to have to be very specific on student loan payments, because they would always apply any extra to either a proportionate interest/principal, or just reduce the amount of my next payment due. I was always on the phone with them.

Same here. I have a box to enter any additional amounts and where to apply the payments.

[JoeChalupa]

still dont understand

On day you will .............but not yet........not yet.

[ShoogarBear]

If I pay off my principal, do I get less time in detention?

[NorCal510]

On day you will .............but not yet........not yet.
One day...

that day, all you oldies will be long gone. hehehe

[DarkReign]

Excellent thread.

I went thru my 5 year loan on my truck overpaying every month by $100.

It was a 60 month loan, and after overpaying every time, I reduced it to ~53 months.

I didnt understand, therefore stopped the practice of overpaying on loans.

[RuffnReadyOzStyle]

Yet another example of the way business nickle and dimes the shit out of anyone who isn't vigilant (ie. the vast majority of people).

Good post.

[Pablo Escobar]

not yet not yet - lol classic

[jaffies]

I might need some help with this.

I am currently repaying a loan of about $5000.
the min. payments are about $95.
I usually send in about $700 every couple on months and the next due date is pushed back depending on the amount of min. payments met.
But, when it comes time to apply the money to the balance, it goes towards the interest first, then the balance.

Is this correct/normal?

I can't find anywhere in the paperwork that shows an option to do otherwise. There are 2 options:



Pre-Paying Principal- I do not wish to have my next payment due date advanced by the number of additional whole payments made. I understand that funds paid in addition to my present amount due will first be applied to satisfy any outstanding fees and interest and any remaining funds will be applied to my principal balance. I will continue to make payments as scheduled each month.

Paying in Advance - I would like my next payment due date advanced by the number of additional whole payments made. I understand that funds paid in addition to my present amount due will first be applied to satisfy any outstanding fees and interest and any remaining funds will be applied to my principal balance. While I may not have to make my next monthly payment amount, interest will still accrue on my outstanding principal balance.

What can I do and/or What am I doing wrong?

[BacktoBasics]

Thats where you are getting the shaft. If I'm understanding correctly you are paying the extra amount and they are simply pushing back upcoming payments because you "had it covered" with you big payments.

This will end up being a loan that gets paid early but in the full amount. Rather than paid early with interest avoided.

What you need to do is make your minimum payment then ask them to apply any extra amounts directly to principal. This way the loan principal amount gets smaller and less interest accumulates. What they are doing is taking all those extra amounts and still applying it to interest and principal so they end up collecting the full boat from you and early.

The idea is to not only pay the loan off early but avoid hundreds of dollars in interest accumulating of the length of the loan. Lower pricipal amount means there is a smaller amount to charge interest to. Hopefully I made sense there.

[ploto]

I don't see how they are getting away with this. Interest is compounded (probably monthly in your example) and you only owe the interest that has accumulated to that date. You can't pay interest that has not yet accrued. The remainder of the payment would have to go to reduce the principal. Unless you signed a loan for a specific interest amount.

[ShoogarBear]

Yeah, I'm getting confused, too.

Say I take out a loan for $10,000, which I'm supposed to pay back over 10 years. After 5 years, I have paid back $5000 (plus the interest payments charged to that date). If in the next month I have $5000+change to burn and want to pay off the loan, they are supposed to tell me the payoff amount (which will be $5000 plus the interest on it for that month, say $5050).

Are you saying that what they are doing instead is calculating the interest on $5000 FOR THE REMAINING FIVE YEARS, and using that as the payoff amount? I don't see how that would be legal.

[CubanMustGo]

Yeah, I'm getting confused, too.

Say I take out a loan for $10,000, which I'm supposed to pay back over 10 years. After 5 years, I have paid back $5000 (plus the interest payments charged to that date). If in the next month I have $5000+change to burn and want to pay off the loan, they are supposed to tell me the payoff amount (which will be $5000 plus the interest on it for that month, say $5050).

Are you saying that what they are doing instead is calculating the interest on $5000 FOR THE REMAINING FIVE YEARS, and using that as the payoff amount? I don't see how that would be legal.

Only if they used simple rather than compound interest.

[ShoogarBear]

Only if they used simple rather than compound interest.It doesn't matter. If I want to pay off the entire balance of the loan, they are suppose calculate a payoff amount which is based on the balance of the principal and the interest rate (simple or compounded) that applies to that balance for the month. I don't see how they can calculate interest based on the other remaining months.

[BacktoBasics]

They are allowing you to payoff a loan early but they are still charging you as if it went full term, that is how I'm seeing this. Unless there is some kind of loophole I'm not seeing.

I've had countless customers paying extra into their loans and the "extra" part is still being divided up between pricipal and interest. So they are paying the loan off early but at no savings for doing so. As far as the legalities of this I don't know.

Maybe some further investigation is needed but in any event it seems pretty fucked up to me.

The part that bothered me the most was how it was only happening to some customers. Now that may be because they have this apply to "principal" option when making a payment and others have simply just sent in a bigger amount on say one check.

[BacktoBasics]

It doesn't matter. If I want to pay off the entire balance of the loan, they are suppose calculate a payoff amount which is based on the balance of the principal and the interest rate (simple or compounded) that applies to that balance for the month. I don't see how they can calculate interest based on the other remaining months.Now when we make payoffs its not divided between pricipal and interest. Maybe thats how they get away with it. When you make run of the mill payments with a little extra you aren't noticing how its applied. They may see a full payoff as different. If you pay it off in its entirety you avoid further interest charges. I can't say.

All I know is I've had no less than 20 customers in the last 4 months dive deeper into their loans and request a printout of how their money was applied. Sure enough the amounts are being split. Even when paid seperately. IE you make your scheduled payment on the 15th. Then you put an extra 500 into it two days later. That 500 is being divided between interest and principal not being put directly to principal like it should.

I'm open to any clarification on this because its just doesn't seem right.

[CubanMustGo]

Well, if they are paying two days later then there IS two days of interest accrued. But if I send $500 over in a single payment then NONE of that $500 can be interest if the interest is compound interest.

[BacktoBasics]

Well, if they are paying two days later then there IS two days of interest accrued. But if I send $500 over in a single payment then NONE of that $500 can be interest if the interest is compound interest.
Well sure interest is accrued but the extra amount traditionally was applied to pricipal until the next scheduled payment.

I'm not seeing the monies split up like 490 to pricipal and 10 interests. I didn't do the math but just like all loans they are interest front loaded and all the overage payments seem to be split up as if they are normal scheduled payments. Do you understand what I'm saying.

If my observations are wrong I'll be happy to recant but its not looking normal to me. Especially these people who have paid a 20k loan down to 10 in a years time and their printout sheets look like a normally scheduled payout sheet and you are seeing thousands of dollars not going to principal and being split as if it was a full term loan.

[ShoogarBear]

I'm not claiming to be a finance whiz, but if that's what's going on it sounds pretty sleazy. I also don't see how they could change the terms of the loan in midstream.

The only reason I know it's not happening to me is because Quicken is good at following how much of my payments should be going to principal vs. interests and what should happen if I make an extra payment. The only thing I can suggest to someone who thinks something strange is happening is to compare Quicken's calculations (or that any standard financial calculator) to their loan statements.

[ploto]

I still do not see how they can in any way do this. Now, if I agree to borrow $5000 and pay a $500 set amount for borrowing that money, then I agreed to pay that full $500 no matter how soon I pay it off. But the whole point of regular loans is that interest is only calculated on the current balance at whatever the agreed upon increment is- daily or monthly.

It sounds like they are taking the extra money and applying it proportionately toward the next scheduled payment, but that makes no sense mathematically speaking because no interest is due on that day.

All you need is an amortization schedule with your principal, interest rate, and term.

http://www.bankrate.com/gookeyword/mortgage-calculator.asp

[AnkleBreaker21]

One day...

that day, all you oldies will be long gone. hehehe
:lol :lol :lol

[xrayzebra]

I might need some help with this.

I am currently repaying a loan of about $5000.
the min. payments are about $95.
I usually send in about $700 every couple on months and the next due date is pushed back depending on the amount of min. payments met.
But, when it comes time to apply the money to the balance, it goes towards the interest first, then the balance.

Is this correct/normal?

I can't find anywhere in the paperwork that shows an option to do otherwise. There are 2 options:




What can I do and/or What am I doing wrong?

If you belong to a credit union or can join a credit union,
do so, then
take a loan out from them, pay off the other loan.
Credit unions belong to you and add the interest on
each month, therefore if you pay it off early, no interest.
And the amount you are paying interest on is reduce
accordingly. Some credit unions have mortgage loans,
you would need to talk to them about that.

But I have always bought expensive items, I wanted to
pay off over time, by taking a credit union loan out.
Two reasons, much lower interest rates and if payed
off early no penalties.

Some credit unions make it very simple to get a loan,
even to the point now you can just go to a teller and
handle the whole thing with them. Apply on line and
have signature loans. It takes about 15 mins in most
cases to get small loans. Cars not much longer and
you can even handle most of it on the phone and go
in and sign the papers.