Question

My loan payments are applied to my balance in this order.

Interest then principal and if there are misc. charges, like a late fee that is applied last.

So if I made a large payment and the company applied $700.00 of my $800.00 payment to the “extra charges”..... and only the $100.00 to the interest and the principal, that is not really helpful for me, correct?

-So what happened is that I was told that the $700.00’s was supposed to be added on at the end of my loan,....

WOULD IT NE BETTER FOR ME IN THE LONG RUN FOR THE $700.00 to be added at the end? Because if the $800.00 went to the interest and principal now then it would have made my payment go down faster, correct?

Or does it not make a difference if I pay the $700.00 extra charges now vs.later?

Does that make since??

Please explain

Answer 1

Yes, the first scenario is correct and not really helpful for you because the majority of payment of $800 (i.e. $700) is going towards miscellaneous charges and hence the amount owed by you does not fall considerably. As such you will keep paying higher interest amount in future as well because your principal amount has gone down just marginally.

It will certainly be better for you if the $700 is added on at the end of your loan. This is because after the interest payment the amount will service your loan outstanding in the form of principal payment and this will ensure that your loan outstanding balance goes does significantly now.

It will make a difference if you pay the $700.00 extra charges now vs. later. Paying the $700 charges later will be financially beneficial for you as you will be able to reduce your outstanding principal balance now only and this will reduce your interest payment in subsequent years. Hence paying the $700 charges later makes a lot of sense.