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Interest payments *increase* year-to-year on a fixed loan??
Old 02-19-2008, 09:02 PM   #1
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Interest payments *increase* year-to-year on a fixed loan??

So I just received the tax statement for my wife's student loan, and it turns out that I paid more in interest in 2007 than I did in 2006. It's a fixed-interest loan, and we didn't miss any payments, so I was pretty intrigued how that could happen. I did pay a little extra in 2007, but I assumed that was going towards the principal. Not so. I called the loan company, and after a lot of talking to supervisors and what not, someone finally offered the explanation that any payments beyond the minimum amount are applied to future payments, and so could go towards interest as well as principal. Huh? How does that work? That just seems illegal to me. Is this a common practice?

I'm currently paying online, and the only way I can make sure that extra payments are applied to the principal is to mail a check to a specific address the company has. Good grief.
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Old 02-19-2008, 09:31 PM   #2
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I have heard of unscrupulous lenders allocating extra payments to "prepayment of future interest" instead of allocating them to principal reduction. Maybe check the loan contract for verbiage that would allow them to do this? Otherwise, send a check with a cover letter indicating the check is intended to be an additional repayment of principal and not a prepayment of interest charges.
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Old 02-19-2008, 09:36 PM   #3
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Do check the contract verbiage to see how they treat lump sums sent in. Even if they will apply them to the principal, I have always heard that you have to SPECIFY that lump sums are to be applied to the principal only, and that it is a good idea to even write that on the check.

When sending in lump sums on my mortgage, for example, I always wrote APPLY TO PRINCIPAL ONLY! on the additional payment form that they gave me to use (in large block letters), and also on the lower left part of the check itself along with the mortgage loan number.

I'm sorry that this happened to you! It must have been a shock.
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Old 02-19-2008, 09:40 PM   #4
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It sounds like the loan is a precompute rather than a simple interest loan. Under a precompute, the total amount of interest is determined at the time of financing and any early payments go against that balance (but the total interest charge doesn't decrease). If you payoff the loan early in full, you could request a refund of the unearned interest charges under the rule of 78s. This is better than nothing, but still not that great since the interest is frontloaded, you will not get as big a refund as you might expect. All of this should be specified in the loan documents. Generally, precompute loans are less advantageous for the consumer, since there is effectively a prepayment penalty.
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Old 02-20-2008, 08:03 AM   #5
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...I'm currently paying online, and the only way I can make sure that extra payments are applied to the principal is to mail a check to a specific address the company has. Good grief.
Could you create another "payer", with this new address, for principal only payments? Perhaps your bank will allow you to add a "principal only" note when you're adding/creating a new "payer"...
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Old 02-20-2008, 08:11 AM   #6
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do you have a choice in the amount you pay when you pay, or is it hard coded?
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Old 02-20-2008, 08:49 AM   #7
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I'll go back and see if I can find the original contract, but on the back of the statement it says: "If you send a greater payment than is due, we will apply the additional amount to your principal balance." Yay, great! But then the next sentence says: "Unless you instruct otherwise, we will advance your due date one month for each full and partial payment received that equals one full payment." Those two sentences seem to be contradictory.

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do you have a choice in the amount you pay when you pay, or is it hard coded?
I do have a choice in the amount, and I think I could pay extra at any time, though I've never tried doing an out-of-cycle payment.

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Could you create another "payer", with this new address, for principal only payments? Perhaps your bank will allow you to add a "principal only" note when you're adding/creating a new "payer"...
I'm not sure exactly what you mean by this, but I asked them if there was a way to make principal-only payments online, and they said no.
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Old 02-20-2008, 09:42 AM   #8
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...I'm not sure exactly what you mean by this, but I asked them if there was a way to make principal-only payments online, and they said no.

Well, a check is a check - it should not matter it came directly from a bank. What did they tell you to do? My understanding was that you were instructed to send a check to an address different than one you use for regular payments. If so, you can set up 2 profiles for your (wife's) loan: one for regular payments at address A and another one for principal only payments to be sent to address B. The only problem you may have is if they require a "principal only" statement to be written out on the actual check received and your online banking does not allow you to specify it.

edit: I agree, the two sentences seem to contradict each other... weird set-up.
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Old 02-27-2008, 09:36 PM   #9
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Originally Posted by CompoundInterestFan View Post
So I just received the tax statement for my wife's student loan, and it turns out that I paid more in interest in 2007 than I did in 2006. It's a fixed-interest loan, and we didn't miss any payments, so I was pretty intrigued how that could happen. I did pay a little extra in 2007, but I assumed that was going towards the principal. Not so. I called the loan company, and after a lot of talking to supervisors and what not, someone finally offered the explanation that any payments beyond the minimum amount are applied to future payments, and so could go towards interest as well as principal. Huh? How does that work? That just seems illegal to me. Is this a common practice?

I'm currently paying online, and the only way I can make sure that extra payments are applied to the principal is to mail a check to a specific address the company has. Good grief.
Is it by chance GLHE ? I went thru this with them a few years back...
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Old 02-29-2008, 09:40 AM   #10
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Is it by chance GLHE ? I went thru this with them a few years back...
Hmmm... not sure. What's a GLHE?
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Old 02-29-2008, 12:05 PM   #11
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Hmmm... not sure. What's a GLHE?
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