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Lets say your loan payment is $100 a month.

What is the differences between:

  1. making a regular payment for $120
  2. making a regular payment for $100 plus an additional principal reduction payment for $20

Is it the same thing?

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+1 Good question, thanks for asking it. – C. Ross Apr 7 '10 at 12:10
up vote 6 down vote accepted

Choice 1 will likely make the payment due and also apply $20 to the next month's payment due. So you'd owe $80 in month 2.

Choice 2 will make the payment due and then lower the principal by that $20. At 6% over 30 years, that $20 will knock off more than $100 off the last payment due.

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Thanks, I was hoping this wasn't the case. I am being royally screwed on my student loans then, they don't allow payments to be made on the principal. – Tim Apr 7 '10 at 12:51
    
"Choice 1 will likely make the payment due and also apply $20 to the next month's payment due." This is not true in my case. The $20 goes toward the principal and my next payment due is still $100. In this situation, is there any difference between the $120 regular payment and the $100 regular payment + $20 principal-only payment? – ThisSuitIsBlackNot Jan 8 at 16:08
    
Thus my choice of words - "likely" means just that. In your case, the bank doesn't require the implicit assignment of extra payment to principal, they do it automatically, which is good – JoeTaxpayer Jan 8 at 19:46

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