Take the 2-minute tour ×
Personal Finance & Money Stack Exchange is a question and answer site for people who want to be financially literate. It's 100% free, no registration required.

I have this data (modified dates) in my transaction history: (APR=.99%) I have made 4 payments till date.

4th  Paid on: 06/25/2001     $1000.00
     Principal               $1000.00       //Paid $1000 on principal this month 
3th  Paid on: 05/03/2001     $1000.00       //Paid $1000 
     Interest                $8.13   
     Principal               $991.87     
2th  Paid on: 04/06/2001     $1000.00       //Paid $1000
     Interest                $14.64  
     Principal               $985.36     
1th  Paid on: 02/21/2001     $1000.00       //Paid $1000
     Interest                $10.48  
     Principal               $989.52

Now, what does this mean. In the first 3 payments where I have made the standard payment, what is the interest charged and on what amount? How does the principle become 989.52 in the first one?

What is difference if I pay on my principal? I am not charged any interest right?

I am trying to deduce that, if I keep paying my principle in large chunks and pay off my debt in the next 4 months, will that save me some money?

share|improve this question
    
Jan 1 and Apr 1 were Sundays. I am guessing that this account is charging interest daily, and the exact dates would allow posters to answer with precision. Inaccurate data prevents that. –  JoeTaxpayer Jul 12 '12 at 1:13
1  
@JoeTaxpayer Even if interest is compounded daily, since a month's interest is about $10, a couple of days here and there because of Sundays, Bank Holidays, Christmas, Thirty Days Hath September,... etc should not change $10.48 charged for the month of December (and paid January 1) into $14.64 for the month of January (and paid February 1). The numbers are just plain inconsistent; something else is going on that has not been revealed to us. –  Dilip Sarwate Jul 12 '12 at 1:40
    
Dilip, agreed, but a home equity line accrues daily, so if payments are due on the first, but made say 10 days early, you have a 20 day accrual, then a 40 day actual. I was trying to point out that instead of fictional dates, op should provide real info to get good answers. –  JoeTaxpayer Jul 12 '12 at 3:02
    
The data is definately incomplete. However the interest of 10.48, 01/01 could be for a partial period of december [say 20 days] as the loan was started mid month. The intest of 14.64 could be for 31 days of Jan, and the so on ... –  Dheer Jul 12 '12 at 4:48
    
thanks for the info guys, I will put up the actual dates then. I guess they are harmless. –  zengr Jul 12 '12 at 5:59

1 Answer 1

You need to provide more information since your numbers are inconsistent.

Most loan agreements call for payment of a fixed amount (say $1000) at periodic intervals (e.g. 1st of every month), with part of the payment going towards the interest charged and part towards repayment of the loan amount (principal). Each successive payment has less going to interest and more towards principal than the previous one

  • You might have owed $12703.03 as of 12/01/2000 on which the interest was $10.48 = 12703.03*0.0099/12 = $10.48. So on 01/01/2001, your $1000 payment went to pay that interest, and the rest of the payment $989.52 reduced the amount owed to $11,713.50.

  • The $11,713.50. owed as of 01/01/2001 would have generated an interest due of $11,713.50*0.0099/12 = $9.66, not the $14.64 that you show as paid on 02/01/2001. So there is additional information that you are not telling us. The interest shown on 03/01/2001 is more consistent with the downward trend in the amount allocated towards interest.

As to your question, interest always accrues and so if on 04/01/2001 you made a principal-only payment of $1000, the interest accrued between 03/01/2001 and 4/01/2001 would add to the loan amount still due. In any case, paying off your loan in huge chunks will reduce the total interest that you will pay, but your question

What is difference if I pay on my principal? I am not charged any interest right?

indicates some confusion. If you make a principal-only payment, you will not be charged interest any more on the amount of the payment, but interest charged earlier on this amount will remain unpaid, and you will be charged interest on the interest that you have not paid.

Also, you need to look at your loan agreement. Making a payment off-cycle generally does not relieve you of the responsibility of making your monthly required payment, but what the off-cycle payment (or extra amount paid along with on-cycle payment) does do is change the split of the next payment, with less going towards interest payment and more towards principal repayment. So yes, making additional payments is generally beneficial, with the caveat that if you have other debt e.g. credit-card balance, also, then you should apply your extra payment towards the debt with the highest interest rate.

share|improve this answer
    
I agree the numbers used in the example were inconsistent, therefor more accurate numbers are needed. –  mhoran_psprep Jul 11 '12 at 19:33
    
the paid, interest and principal values are exactly the same as I got from them. I changed the dates. –  zengr Jul 12 '12 at 0:47
    
I have provided the exact dates, does that help? –  zengr Jul 12 '12 at 6:05

Your Answer

 
discard

By posting your answer, you agree to the privacy policy and terms of service.

Not the answer you're looking for? Browse other questions tagged or ask your own question.