People trying to get ahead on their car and house payments are sometimes shocked to discover the default way that banks handle their extra payments. Instead of paying down the existing principal, they apply it to the future interest. Not only that, but you can’t just call them up one time and ask for them to change how they handle your payments. You need to call them every month you make a payment. Here’s a tale from reader Katherine:
We just realized that the extra we have been paying over the amount due has not been going to the principal on our loan. So we called to change this only to be told we would have to call every time we paid more – or every month to instruct them to credit the extra money to the principal. Every month ?? I asked, “oh yes we are not set up do that. A different person may process the account every month. I still cannot believe that this is how they do business, but I guess they NEED to suck as much money as they can. Thank you Wells Fargo – for nothing that is.
That’s right, not only is the default that you’re opted in to having your payments applied to future interest, which means that you end up paying extra in interest, there’s no way to opt out. Every month you make an extra payment, make sure to call the bank to make sure it is applied correctly to the principal.
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