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I would to understand how loan repayments work. Let's say I take out a loan for $100,000 at 5% for 5 years. I would have a monthly payment of $2,124.70. This payment is expected to be paid monthly. Here now comes my question. Say I make a payment of $3,000 in the middle of the month, how does this affect my payment for this month? Will the bank consider my $2,124.70 payment that I was scheduled to make as paid for that month?

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  • The monthly payment should not be $2,124.70 according to the given information. $100,000*5%/12 = $416.67. Mar 27, 2023 at 15:50
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    @AriBrodsky that's only the interest payment. Principal needs to be repaid too.
    – RonJohn
    Mar 27, 2023 at 16:30
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    I checked with excel and an online loan calculator (5% for 5 years for 100K loan) is $1,887.12 a month. Mar 27, 2023 at 17:21
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    @AriBrodsky incorrect wording by OP?
    – RonJohn
    Mar 27, 2023 at 17:22
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    @AriBrodsky Apologies guys, I meant the full payment, not just interest.
    – Mr.Rlover
    Mar 27, 2023 at 19:52

3 Answers 3

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It depends on the terms of the loan and how you classify it, but the 3 common ways it can be applied are:

  • The accrued interest up to the day of the payment is calculated, and the remainder of the payment goes to reduce the principal. If you are allowed to skip, and choose not to make, your scheduled payment, you'll pay slightly more interest the next month since there would be a longer period between payments.
  • The accrued interest is calculated as of the date of your normal monthly payment, with any amount over the monthly payment amount reducing the principal further. The servicer pay show the payment as "pending" or "on hold" until the due date - this is how my bi-monthly mortgage payments were processed.
  • The entire extra payment goes to principal, and you still owe the "monthly" payment. You typically have to explicitly choose this option if they even allow it.

If you have any accrued late charges or past due balances, those would most likely get applied first before any of the above options.

Call your loan servicer and ask them, and they can give you the specifics for your loan.

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    Option #2 is how Chase handles auto loans.
    – RonJohn
    Mar 27, 2023 at 16:32
  • Same for mortgages (they "hold" the payment and apply it on the due date).
    – D Stanley
    Mar 27, 2023 at 16:49
  • Note, option 1 and 3 have the same effect on total amount paid over the course of the loan, assuming you make all your scheduled payments in addition to the unscheduled payment. This is because interest is computed on current balance (principal + interest), and paying down current balance by a fixed amount reduces future income by another fixed amount regardless of whether the payment reduced principal or interest. Mar 28, 2023 at 0:30
  • @ReinstateMonica: Presumably there'd be small discrepancies based on the compounding schedule for the interest; if interest compounds daily, I believe the two should be the same, but if the interest compounds, say, monthly, #1 (paying accrued but not yet compounded interest first, so less interest-accruing principal is paid) would be slightly worse than #3 (paying off solely interest-accruing principal, doing more to reduce the rate at which interest is accrued). Not a huge deal, but it's not identical in all circumstances. Mar 28, 2023 at 21:37
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I'd check with your bank or read the loan papers.

Loans I've had have generally said that any payment you make, you must specify whether it is your regular monthly payment or a "principal only" payment. If you say its a principal only payment, then the entire amount goes to principal but you still owe your regular payment when the due date arrives. If you say its your regular payment, then if it's more than the payment amount, any excess goes to principal.

Whatever you send, when the next payment due date arrives, they calculate how much goes to interest based on your principal balance at that time.

Typically, if you send a payment in with a payment slip or with a copy of a monthly bill, they assume it's your regular payment unless you say otherwise.

I had one loan recently that said that if I sent in a payment after the billing date and before the date due, it was applied as a regular payment. Otherwise it was applied as principal only. Which seemed unnecessarily complicated as I then have to know the billing date even if I haven't actually got the bill yet. (Yes, I could check the web site.)

I find D Stanley's answer interesting because his first two possibilities have never been how it worked on any loan I had. Not saying he's wrong, just that apparently he's gotten loans with different terms than I have. That's why you should check with your lender before making assumptions.

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For the mortgages I have had you had a choice. You could make the $3000 cover the next monthly payment, in which case no payment is due at the regular date. The remainder is applied to principal, which will reduce the interest due next month but not the payment. You recover your prepayment at the end of the loan by reducing or eliminating the last payments. If you do the math, you have received interest in the rate of the loan over that period. The second choice would be to apply the whole $3000 to principal, in which case you owe payments as planned. You will have a larger reduction in principal which will result in more reduction in payments at the end of the loan. You get the same interest, but now on the whole $3000 instead of the excess of $3000 over your usual monthly payment.

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