Make Sure Your Supplementary Student Loan Repayment Is Correct
Paying off your student loan early is usually a smart idea. But be careful when paying more than your minimum monthly payment. Many banks will apply an additional amount to your interest rather than the actual amount of your loan – the principal amount.
CBS News reports:
If you want to pay more money each month to pay off your debt, make sure you make it clear to your lender that you want the extra money to go towards paying off the principal. “Otherwise, [the bank] will keep it as a reserve for future payments,” which will include interest, says Kevin Walker, CEO of SimpleTuition.com. Borrowers are not always aware of this, he said. In fact, it happened to me one day when I put an additional payment on my mortgage bill. Since I did not specify that I wanted to lower my principal, more than half of the additional payment went towards paying interest next month.
It happened to me too. I realized that my additional payments had been applied to my interest (as per the bank’s original payment schedule) when I saw that my loan principal had not decreased as much as it should. I called the credit office and they explained to me that they are applying the payment to interest next month. Sneaky. This keeps borrowers from paying off loans ahead of time and ensures that they pay as much interest as possible, making your attempt at early repayment senseless.
Fortunately, this is easy enough to fix. When I sent the additional payment, I just had to write “contact the principal” on the check. But if this happens to you, call the customer service and ask what you need to do to really reduce the loan amount.
For more details please follow the link below.
Pay Your Way Out of Student Loan Hell | CBS News