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Thursday, August 5, 2010

How Can I Get Away With Paying Less Interest On Loans?

Question:

If I took out a simple interest loan mortgage and paid the first payment off one month ahead of schedule and then paid each following month the mortgage payment could I cheat paying the interest for each following month on each payment.

Month 1 - Payment 1, Payment 2
Month 2 - Payment 3
Month 3 - Payment 4…


Answer:

If you did that you would be able to skip exactly one interest payment. Each month you have to pay at least one interest and one principle payment. Additionally, if you do not specify which principle payment you are paying, they will allocate your payment to the last payment on the back end of the loan and then work forward.

If you do it right, rather than paying off one payment by doubling up you could pay about 20 principle payments if you specified that you were paying off the first 20 payments. You would then skip the interest payments on all 20 of those payments. 



For example if payment 1 equals $600 with $570 going for interest and $30 allocated to principle and you sent in an extra $600 and specified that it was for the principle on payments 2-21 you would save about 20 X $570 or about $11,400 in future interest payments.

If you do it wrong, they will apply your principle payments onto the back end of the loan where each payment pays about $570 in principle and only $30 in interest. In other words, if you do it right you save $11,400 in interest and if you do it wrong you only save $30 in interest. 



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1 comment:

  1. Its hard to get credit uner a 10% interest rate even if your credit is outstanding.

    ReplyDelete

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