Verify Extra Payments Are Applied To Your Principal

The Chief Family Officer blog outlined her strategy for paying off student loans faster.

One of the things she does is send in more money than what is due when she has extra cash, a great tactic. But she has to be on her lender’s ass to make sure they’re using it to pay down her interest and principal. Instead, they prefer to “advance the due date” and simply apply the money to the next payment. This is no good, so she says to get on the phone with them to make sure they’re applying the money the way you want.

How I’m paying off my student loans [Chief Family Officer]
(Photo: Getty)

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  1. Trevor says:

    I do that with my debt all the time, but instead of just not paying when they say no payment is due the next month I make one anyway, what’s the matter with that?

  2. protest says:

    i’ve been on the phone with AES multiple times because i’ve told them i want my extra $$ applied to my principal but on my statements it says nothing is due, leading me to believe they are applying it as advanced payment. they insist it is going to my principal, and on the website it looks like it is because each payment is broken down to interest and principal, but i still don’t know why my payments are always $0 due.

  3. mantari says:

    Some places are worse than others about that. I found that Wells Fargo is the only one I have payments with who decides that an extra payment is just an early part of the next payment. In effect, a free loan of money to Wells Fargo, not to be applied to the balance.

    Uh…. thanks, Wells Fargo? You simply misunderstood what the extra money was for? I know, I know… you’re only working against me so that you can serve me better, right?

  4. DrGirlfriend says:

    My Sallie Mae account gives me the option, when I pay online, to direct where my extra payment goes (whether to principal or toward the next payment date). IIRC I set it as a default, I don’t have to do it every single time. It’s definitely a good thing to look into if you are actively trying to reduce the debt.

  5. mantari says:

    @protest: I believe AES is telling you that you are getting ahead on your payments, and that you’ve made this month’s payment, the next month, and so on. That, of course, is completely different than the extra amount going to pay the principle.

    They take your extra payments, and when there is enough to equal a totaly payment, they apply it all at that point, but as a regular payment, just putting you a month ahead. As opposed to putting the extra you pay against the principle.

    Yeah. They’re scamming you. Legally. They’re just working against you in order to serve you better.

  6. gorckat says:

    I do that with my debt all the time, but instead of just not paying when they say no payment is due the next month I make one anyway, what’s the matter with that?

    What you are doing is compressing the time it will take you to make all the payments. Its the difference between a payoff balance and the total balance over the life of the loan. Intereset for years 2-29 hasn’t accumulated on my mortgage yet, so if I paid off the mortgage today, it’d be one helluva lot less than the total of my payments for 30 years.

    If the loan term if 5 years (60 payments) and you make 2 payments a month without the extra going to principal, you still pay 60 times (they will, as stated by others, basically hold your payment until it is due).

    If, instead, you have them put those extra payments towards the principal, less interest accumulates meaning you cut down the total of your payments.

    If I mussed something up, feel free to correct me…I’m neglecting work again :p

  7. Arlahna says:

    I only have one debt that this happens with and that’s my car payment, which has a 0% interest loan anyway. I still pay the same amount every month. I never thought they might not be applying every penny to my balance as opposed to just prorating the next payment.

    My other cards don’t seem to do that, but maybe I haven’t been paying close enough attention. I think I need to look into this.

  8. Yogambo says:

    Wells Fargo = scum. I got a “pinch” loan twice from these low lifes. It was called PLATO, such a noble loan, designed to fill the gap in undergrad loans and grants so you could make tuition, books, etc.

    It kicks it at 13% currently (though it must’ve been less initially, unless I was insane, drunk or both). I’ve been paying on it for maybe 6 years and it’s gone down squat. Why?

    It looks like 80% of my payment goes to interest, only a smidgen to principal. I asked for a printout one time of all my payments because I was sure they were screwing me — how can a loan of $8k after six years, be only 3/4 satisfied. They cried but sent it. There it was, proof of a six-year screwing.

    I still can’t figure it. It seems even if I pay out and move it somewhere else, they take bloody ransom. How can a so-called student loan be such a screw. Anyone have any idea how this math is working. Should 13% on a loan of 8-10k take 10 years to pay off? Should each payment be no more than 25% principal (usually (always) much less). I feel a knife in my back.

  9. Gannoc says:

    AES are a bunch of scumbags.

    I have made extra payments in the past. Even through they do apply it to the principal, they send you a bill for $0 until (theoretically) the standard monthly payments catch up to your extra payments.

    All right. EXCEPT: If they send you a bill for $0, and you don’t pay it. (and I imagie many people do this), they count it as delinquent and you lose the interest rate deduction you get after a few years.

    It has to happen pretty often, since the form letter explaining this EXPLICITLY says that even though they might send you a bill for less than your full amount, or $0, you still have to make a full payment or they count it as delinquent. It is clearly a way to scam people into keeping the higher interest rate.

  10. Vicky says:

    @mantari: I have the same experience with Wells Fargo, on both student loans and a car loan. On my student loan I was told by phone that their system does not allow principal to be paid off separately. On the car loan I’ve fallen into a habit of emailing them a complaint and request for payment re-allocation every month.

  11. hornrimsylvia says:

    I caught my bank doing this once! I caught it a few days later and demanded that they put the extra money to the principal, and back date me the few days of interest they were charging on that portion. They told me to go home and they’d correct it, but I refused to leave until they refunded me the interest.

    It pays to look at your statement every month, just so you know what is “normal”. That way, when you put an extra payment to the principal, and your bank tries to scam you, you know what looks fishy.

  12. Gannoc says:

    @Yogambo:

    If a loan term is 10 years, then it will take 10 years to pay off regardless of the interest rate.

    Student loans have a standard term of 10 years.

    13% is high for a student loan, but Wells Fargo didn’t screw you. That is just the way loan payments work.

  13. muddgirl says:

    For two of my loans, the payment address is different if I’m making a “Principle Payment Only” payment vs. a monthly payment. This is true for my car loan and a student loan from SLFC.

    Another thing to do is pay by check and make sure “PRINCIPLE PAYMENT ONLY” is written in the Memo line. Then, when they endorse the check, you have a receipt that proves they didn’t follow your instructions.

  14. hustler says:

    I learned this the hard way. Why isn’t anyone bitching about th 13%+ aprs? Oh, that’s right, because no judge or politician is concerned with the middle class.

  15. dcaslin says:

    When paying off principal of a loan early, I’ve always mailed a check with a printed signed, letter something like: “Dear Bank,

    Please apply the enclosed check to the principal of my loan for account xxx-xxx-xxxx”.

    It’s a pain if you do monthly extra payments, but I usually save up a larger chunk of money and do it a few times a year at most.

    At my job I’ve done work in the document processing departments of banks and they usually, by law, have to scan and store any account related documents (like these letters) for years. This has the side effect of making them more likely to actually do what you ask the first time.

    It sucks, but I can understand why a bank wouldn’t *assume* that an extra payment goes towards principal automatically. Let’s say you owe $100 each month on a loan and you write them an check for $150 in the middle of the month (without any other info). 15 days later your next $100 payment is due. It’s entirely possible you’re a weird customer who was counting on the $150 being an early payment for next month. If they assume otherwise and charge you a late fee, you’re going to be pissed. Now, ideally they’d wait 15 days and see if you pay extra again, but that’s too complicated for them to track (and what about the 15 days interest they might or might not have charged you).

    Ideally, banks would put on all their forms (web or paper) an option to declare a payment directly towards principle. Perhaps they should make that a law…

  16. kylere says:

    Dcaslin, by choosing to “save up a larger chunk of money” you negate part of your gain, because while the money is sitting in your bank/pocket building up, your interest on the principal accrues normally. Pay as much as you can, earliest, for the maximum benefit.

  17. Fait Accompli says:

    With AES and ACS when you pay above the minimum payment that amount is applied first to oustanding interest and next to principal. If you make extra payments (as I do every month) they apply according to this formula. They do not hold paymnets to be applied later.

    What they DO do, as people have noted, is push out your next payment date. This does not mean you cannot make payments in the meantime, just that you don’t have to in order to keep with the terms of you loan. If you take advantage of this “extra time” though, you are a sucker, because the delay in payment will result in the incurrence of interest you tried so hard to avoid in the first place.

  18. balthisar says:

    @hustler: you don’t have to pay interest; just don’t borrow money.

    For the record, my Wells-Fargo mortgage applies extra payments to principal automatically, without any extra instructions. It’s just a few bucks, ‘cos all I want to do is round off the figure.

  19. yetiwisdom says:

    Keep in mind that, depending on the % interest, if it’s low, you may not want to pay down the interest early and it may be more financially benefical to pay the monthly minimum, especially for mortgages where there are tax breaks for the interest paid. It may seem gratifying to pay the loan out early (and I’ve done it myself), but if the rate is low you may be better off investing the money you are spending to pay down the principal.

  20. hornrimsylvia says:

    @kylere:
    Saving up a large chunk of money could be optimal if you’re trying to build your emergency fund. A number of other factors would have to be in place like a 5-6% interest loan, and if the money was sitting in a 4-5% interest savings account, it may be worth the peace of mind to amass that amount of money in a liquid form. It is hard to get your money back out (sell your house or refinance with bad rates now) once it’s gone to the principal.

  21. dcaslin says:

    You’re right, kylere. I’m not suggesting it’s a good idea to put off making prepayments on loans if it makes sense to do it immediately. I think its important to be realistic about interest savings, though.

    For simplicity’s sake, let’s say you have a $10k loan at 10% interest and you accumulate $1000 extra to pay off over 2 months on it. Sure you could pay $500 twice, and save paying interest on $500 for a month. But what would that save you? It would save one month’s interest on $500 based on a 10% per year interest rate. I don’t know the math precisely, but it should be less than $5.

    Usually I have some other good reason for waiting to prepay a loan (like making sure that I have liquid funds to pay my bills).

  22. Fait Accompli says:

    @yetiwisdom: Good point. As for myself though, I’m in screwville having consolidated my loans in the late 90’s. My rate is at 7.3%. Of course historically the market beats that (and especially lately) but its getting close to a null game if there is much downturn.

  23. FightOnTrojans says:

    @Fait Accompli:
    What you said has been my experience with AES. At one point, I was sending twice the monthly amount to AES for my student loan for about a year. So, when I would get the next month’s bill, it would say zero due, or the next payment date was pushed back one month, can’t quite remember. Anyways, I didn’t realize what was going on then (didn’t have this site to show me the way) and I kept doing that for about 1 year, resulting in me being 1 year ahead on the payments. This came in handy when I got married and we had a kid. I was essentially able to stop paying for 1 year.

  24. vex says:

    @balthisar: Thanks for that comment. Wells Fargo also does this with my mortgage and auto loan. With my auto loan they do push the payment back, but I can also clearly see (via online banking) that the extra payment has indeed lowered the principle (if you click on the payment it also shows you the interest/principle breakdown). I called and verified that this is how they do it.

  25. protest says:

    @Fait Accompli:

    yeah, i just got off the phone with an AES rep, and she explained this to me, that i was not penelized for that one month when i didn’t pay (bad month) because technically i had a bill of $0.
    but she did say that they can’t use your money to pay future interest, so they put any extra toward principal. it is very clear when i use their website-payment history is right there and it adds up correct, its just that the $0 bills were freaking me out.

  26. howie_in_az says:

    @muddgirl: I have an issue with the way Wachovia is handling my car loan. I’ve told them repeatedly that my monthly payment is $xxx and yet I’m overpaying that value by at least $200, noting on the check “APPLY EXCESS TOWARDS PRINCIPLE”. One of their supervisors stated that I’d have to send in two checks, one of which would be the $200 overpayment with a memo saying “PRINCIPLE PAYMENT”. When I informed him that Wachovia had been ignoring my “APPLY EXCESS TOWARDS PRINCIPLE” notes and why would I think they’d suddenly start honoring “PRINCIPLE PAYMENT” notes if they couldn’t be bothered to honor the other memos, he became silent rather quickly.

    As it stands they’re still applying my extra $200 towards the next month’s interest. My next payment isn’t due until January 2008 and I’d just as soon apply those prepayments towards my principle, but I can’t seem to convince Wachovia to do so.

  27. My student reconsolidation loan specifies in the payment book that overpayments are applied to principal.

    I don’t know if I have an un-sketch lender or what. I didn’t even know this was an issue. Really good to know for when I take out my next loan.

  28. Fait Accompli says:

    @protest: No worries. You’re not the only one who freaks out over this. I handle consumer lawsuits and have have had several people contact me complaining about this. I think it catches people by surprise because if they over pay credit cards it has no impact on the next due date.

  29. SadSam says:

    My .02. We are paying off grad school loans $27,000 at 3.5% 30 year term. The first thing I noticed was the minimum amount due each month only covered interest, pay the minimum amount due and the loan would never be paid off. Seems super scammy to me. Second, we are overpaying these loans to get them paid off this year. We set up a monthly auto payment for the minimum amount. We do several payments during the month of $1000+ and the extra money is all applied to the principal, the minimum amount payment covers any and all interest. We receive regular correspondence telling us that no payment is due this month – we ignore said correspondence. We look forward to being debt free by the end of 2007.

  30. lfrandom says:

    The way AES and many other lenders work is that payments are applied first to late fees, then interest, the principal.

    Let’s say your MMP was $100 and you sent in $1000.

    The day you make the payment, whatever interest has accrued on your account will be paid first (assuming no late fee), in this case let’s say $10. The $990 remaining goes towards principal. Additionally, they don’t force you to make another payment for nine more months.

    If you don’t make any payments during those nine months you have lost nothing, the interest is sitting on your loans, but it hasn’t been capitalized, so you aren’t paying interest on interest.

    In fact, unlike credit cards, interest is very rarely capitalized to principal, in most cases unless you go on a deferment (or forbearance), or you change your repayment plan, it will never be capitalized.

    This actually works in your best interest.

  31. Dan25 says:

    @vex:

    You can go to any teller and ask them to apply your payment to principle only if you like. Its not that complicated. Just make sure you fill out your payment coupon correctly.

  32. Fait Accompli says:

    @lfrandom: I agree that it does not work against you, but what is really in your best interest is to continue to pay ahead. If you pay ahead and then use the “extended due date” as an excuse not to make payments, you are still on the original payment schedule (albeit with slightly less interest). If you continue to pay ahead, you will pay your loans off earlier and pay less interest over time.

  33. ChiefFamilyOfficer says:

    Just to clarify, my monthly payment was always applied correctly – the interest accrued was paid off and everything over that amount was applied toward principal. The problem only occurred when I sent in an extra payment (i.e., any payment other than my automatic EFT payment) – BUT it occurred EVERY time I mailed them a check. I included letters, I stapled the check to letters, I slapped a post-it on the check, I stapled a post-it to the check, I used the monthly form they sent (which showed no payment due b/c of the EFT), wrote on the front that I had included directions on the back (where there was a place to indicate how the payment should be applied), highlighted that portion, etc.

    I’m convinced their internal policy was that they always advance the due date – notwithstanding their official policy which said to include a note to avoid advancing the due date (a policy which I received via email, read on their web site, read in snail mail, and was told over the phone).

    I have no problem outing the lender, by the way – my loan was from Access Group and serviced by the Student Loan People.

  34. Bryan Price says:

    So THAT’S what Sally Mae was trying to do. My son started paying his student loan off automatically. We were still getting the statements (he was/is living in Alaska, except for the current deployment to Iraq!) and I didn’t know he was already set up, and the agreement was that we would make his payments, and transfer the funds from his account to ours. I couldn’t figure out why the next statement kept putting the next payment ahead one more month. I paid the bills once a month (the 1st) every month back then, that’s when we got paid. And I knew I needed to make that payment (ha!). It got paid off ahead of time regardless. I kept sending checks, and their robots kept taking money out of his account.

    Looking back, we probably shouldn’t have done it, but it’s done. He didn’t miss the extra payments going out anyway.

  35. zolielo says:

    @Gannoc: That is just how it is…

  36. Jesustron says:

    I recently stopped working for sallie mae, and i can tell you they AUTOMATICALLY advance payments, so if you pay $10,000 you’re just paying your next ‘X’ amount of payments based on your monthly payments. You have to literally demand a supervisor to get that payment applied to principal.