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Old 02-14-2012, 12:29 PM   #1
trophy_taker
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Default Question on paying down loans

I have a student loan that I want to pay off over next five years. It is set up on monthly payments currently. I currently pay $100 extra every monthly top of my payment. I want to add another $150 on top of that. Ok, here's the question:

When is the best time during the monthly period to be paying these extra payments? Isn't there a certain time in relation to your normal payment that would benefit you the most as far as accrued interest goes and getting the most "bang for your buck" as far as paying more towards principal?

My payment is $545 and I pay $645 on the 13th of the month. When do I make the extra $150 payment and should I put the extra $100 I've been paying with it or leave it on top of the 545?

I also pay between 5 and 10k at end of year as well.
Any opinions?
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Old 02-14-2012, 12:34 PM   #2
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My wife ended wchool with well over 180K in loans. we are doing the dave ramsey approach and doubling our payments (understand if this is not doable). we already have 3 of the 12 loans paid off and are putting nearly 700 on the lowest one now. My advice put all you can a month to it.
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Old 02-14-2012, 12:36 PM   #3
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I am more than doubling now, but just wondered I there was any benefit in splitting the payment up each month. I am doing Dave Ramsey plan as well. Thx and good luck getting debt free!
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Old 02-14-2012, 12:37 PM   #4
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Quote:
Originally Posted by trophy_taker View Post
I have a student loan that I want to pay off over next five years. It is set up on monthly payments currently. I currently pay $100 extra every monthly top of my payment. I want to add another $150 on top of that. Ok, here's the question:

When is the best time during the monthly period to be paying these extra payments? Isn't there a certain time in relation to your normal payment that would benefit you the most as far as accrued interest goes and getting the most "bang for your buck" as far as paying more towards principal?

My payment is $545 and I pay $645 on the 13th of the month. When do I make the extra $150 payment and should I put the extra $100 I've been paying with it or leave it on top of the 545?

I also pay between 5 and 10k at end of year as well.
Any opinions?
Not sure what the terms of the loan as far as when it is compounded, but as it is a function of time, the sooner you can put the money in, the less principal left to compound. So if your scheduled to make payments on the 13th, should add the extra cash then.
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Old 02-14-2012, 12:38 PM   #5
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Oh sorry. mis-read i guess. we only pay once a month. but i am no finacial expert.
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Old 02-14-2012, 02:35 PM   #6
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It woud be best to pay it all when it's due. You don't need to split it up.
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Old 02-14-2012, 02:44 PM   #7
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First of all keep GOOD records on all payments. I would pay all extra pays at the same time. If you loan is simple interest it will be easy to keep up with your balance, payments, etc.
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Old 02-14-2012, 03:07 PM   #8
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Pay it all at the same time. That way if a payment is not applied it will be easy to research, as well as you will know when it happens.
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Old 02-14-2012, 03:08 PM   #9
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My wife was told by the holder of her student loan that she could not make principle only payments.( where any extra payments should be made). and that there was an early payoff penalty.
Good ( extra payment calculator ) I am toying with this on a few little loans I have
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Old 02-14-2012, 03:09 PM   #10
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Quote:
Originally Posted by trophy_taker View Post
I am more than doubling now, but just wondered I there was any benefit in splitting the payment up each month. I am doing Dave Ramsey plan as well. Thx and good luck getting debt free!
If you are going to make extra payments pay it on the principle
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Old 02-14-2012, 03:15 PM   #11
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Quote:
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If you are going to make extra payments pay it on the principle
This. Send it on two separate checks. One for the monthly payment, and one for principle. Make sure it is going to principle. if not your gonna just end the note early, and not save any on interest.
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Old 02-14-2012, 03:20 PM   #12
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If you pay it all at the same time, interest due will be paid and all remaining money will go to principle. If you try and split payment then apply to principle, while there is interest owing, your're asking for things to be applied incorrectly.
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Old 02-14-2012, 03:29 PM   #13
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Regardless f how you do it, MAKE SURE the extra is gong to principle.
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Old 02-14-2012, 03:32 PM   #14
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Quote:
Originally Posted by BrianL View Post
If you pay it all at the same time, interest due will be paid and all remaining money will go to principle. If you try and split payment then apply to principle, while there is interest owing, your're asking for things to be applied incorrectly.


Not exactly,
Google paying off loans early. I cant remember the terminology exactly but the best way to pay off a loan early is to make extra payments to the principle
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Old 02-14-2012, 03:35 PM   #15
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Originally Posted by flywise View Post
[/b]

Not exactly,
Google paying off loans early. I cant remember the terminology exactly but the best way to pay off a loan early is to make extra payments to the principle
I agree with flywise.
When we were paying down our mortgage 20+ years ago, we specified the extra payment be applied to principle. Some loans don't allow that, but our mortgage loan did.
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Old 02-14-2012, 03:39 PM   #16
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He first needs to know what type loan he has. Simple interest or Rule of 78

Found this on the net

Occasionally on The Money Show (FM 96.9, WTKK Boston), Rick Shaffer mentions the Rule of 78 in connection with auto loans but declines to explain it in detail because it is too complicated. As an occasional listener and a person who had one of these loans back in 1983, I thought I would make a stab at explaining it...

The standard loan is called "simple interest". You borrow some money and at the end of the period you pay it back plus interest. For longer term loans, you make periodic payments. With some consumer loans, especially with auto loans, you may encounter a different type of loan which mentions the "Rule of 78". It is a different way of deciding how much of each monthly payment is interest and how much is principal.

If you don't terminate the loan early, simple interest loans and Rule of 78 loans will be equivalent. You will pay the same amount and get the interest rate quoted. However, if you pay off the loan early, you will end up paying more interest with a Rule of 78 loan than with the corresponding "simple interest" loan. For that reason, you should not take loans computed on the "Rule of 78".



--------------------------------------------------------------------------------

Here is a simple auto loan with round numbers:

Amount of loan: $10,000
Interest rate: 12% a year (which is 1% a month)
Length of loan: 1 year (12 months)

Simple interest says that after one month has gone by, you have borrowed the $10,000 for 1/12 of a year and you own interest of 12%/12 or 1% which is $100. The rest of your payment goes to decreasing the principal.

The next month you have borrowed $9211.51 for a month and own $92.12 in interest. After paying the interest, the rest of your payment goes to pay off the principal you borrowed.

Figuring out the payments for a simple interest loan is a job for a loan calculator. In our example, it says that the monthly payment is $888.49.

Over the life of the loan you will pay $661.85 in interest.

On the last payment you make, you will have borrowed $879.67 for one month and owe $8.80 in interest. Notice that your final payment is almost all repayment of principal.

If you look at each interest payment, it decreases each month. If you graphed the monthly interest payments, they would form a slight curve.



--------------------------------------------------------------------------------

OK, now let's do the same loan as a Rule of 78 loan:

Amount of loan: $10,000
Total interest due: $661.85 (same as above)
Monthly payment: $888.49 (same as above)
Number of payments: 12
Sum of the integers from 1 to 12: 78 (the magic number)

First month's interest: 12/78 times $661.85
Second month's interest: 11/78 times $661.85
Third month's interest: 10/78 times $661.85
...
Last month's interest: 1/78 times $661.85

If you were to graph the interest payments, they would form a straight line.

If you were to pay the loan off early, you would have to pay a little extra because the initial payments attribute too much to interest, and too little to principal.

How much does it matter? In our example, the worst it would matter is month 5 where the difference between simple interest and Rule of 78 is $4.01. However, our example was chosen to have round numbers and a 1 year loan.

How much does it matter in a typical auto loan? Consider the following:

Amount of loan: $30,000
Interest rate: 7.3% a year
Length of loan: 4 years (48 months)
Monthly payment: $722.57

If you pay this loan off early, you will always pay more with a Rule Of 78 loan than with a simple interest loan. Between months 7 and 29 you will be paying at least $46 more. Month 17 has you pay $66 more. Is $46 - $66 real money to you?
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Old 02-14-2012, 04:07 PM   #17
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Assuming it is a normal simple interest loan, not a split rate or other type, all interest due is paid when you make your regular payment. On that day there is $0 interest due, so any additional amount paid will automaticly go to principle. You can do bimonthly payment, but more can go wrong. Some systems don't allow it, and are carried in an escrow and applied at the next payment due date, some places they total extra payments and they are posted at year end. Most are just applied by the teller that takes them in as a regular payment. Not all tellers can post principle only transactions like that for compliance reasons. A 700.00 payment once a month will payoff with less interest paid than a semi monthly at 350, but both are almost the same in interest paid.

This is much different than a every two weeks payment. Different deal on those. For other type loans other than simple interest, different stuff applies, but those are getting fewer.
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Old 02-14-2012, 04:27 PM   #18
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Paying off a loan to soon will lower your crediit rating. Remember credit ratings arent for your benefit they are for the banks. Paying off loans in advance means they lose money.
Thus making you a less desirable customer.Take your money and buy something real with it.
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Old 02-14-2012, 04:48 PM   #19
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Originally Posted by jmm83164 View Post
Paying off a loan to soon will lower your crediit rating. Remember credit ratings arent for your benefit they are for the banks. Paying off loans in advance means they lose money.
Thus making you a less desirable customer.Take your money and buy something real with it.
paying off a loan early saves money, maybe lots and lots of money
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Old 02-14-2012, 05:15 PM   #20
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All federal student loans are simple interest. Most private student loans are simple interest.

All student loans federal or private are supposed to not have any prepayment penalty.

Federal regulations allow the lender to apply a prepayment to "future installments by advancing the next payment due date" unless otherwise specified by the borrower.2 For this reason it is important to include a note with any prepayment indicating that you want the prepayment applied to reduce the principal balance of the loan. Otherwise, the lender will treat it as though you had paid your next installment(s) early, and may delay the next payment due date(s) as appropriate.
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Old 02-14-2012, 05:32 PM   #21
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Originally Posted by flywise View Post
My wife was told by the holder of her student loan that she could not make principle only payments.( where any extra payments should be made). and that there was an early payoff penalty.
Good ( extra payment calculator ) I am toying with this on a few little loans I have
A lot of early pay off penalties are a percentage of the unpaid balance. If this is the case you can pay all but say $100 and the final month pay the balance plus the penalty computed on $100 which would be $2 for 2%.

Same works if the loans has a fixed fee amount if paid before so many months. Pay all but $100 (or one last payment amount) then divide the remaining $100 by the amount of months and then pay that portion each month. You save the interest and avoid the prepay penalty. I actually had a loan like this but they made me keep one payment amount left. I divided that amount by outstanding months and paid the portion. When I got the statements it showed the pay off and penalty amount each month but I just kept paying the small monthly portion until all was satisfied without penalty.

There is away around every prepay penalty - you just have to think like a banker

I forgot to mention, always write "Apply extra payment to principle" on remittance stub if there isn't a box provided.

Last edited by Ohio Darin; 02-14-2012 at 05:38 PM.
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