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How can banks get away with applying extra principal payments to future payments not yet due?

Robert Hager - 2008-07-16 21:55:14 - Credit

This is happening to me and several friends. Payments made to principal on a current loan get applied to future payments instead of going to principal. This way the bank not only has your money but is charging you interest on the loan. If you call the bank they say they can't do anything about it once it gets into the computer. This has happened with my credit union and several friends banks. They are all different companies.

Best Answer:

I have heard of this happening many times. The best way to handle this situation is to go to the bank/credit union in person and specifically tell the person taking the payment that you want it applied to the principal. Give it a minute and tell them again! Make sure it sinks in! If you can't go into the bank/CU, on your payment stub in big dark letters, write it out that payment should be applied to principal and make a copy of both the stub and your check before you send it. Always get proof. Then later, check your balance to verify that the principal was decreased by the amount that you wanted applied to it.

Answers:

Extra funds are being applied to the principal; there are only two places they can go, the other being interest. What did you think 'future payments' were?

I have heard of this happening many times. The best way to handle this situation is to go to the bank/credit union in person and specifically tell the person taking the payment that you want it applied to the principal. Give it a minute and tell them again! Make sure it sinks in! If you can't go into the bank/CU, on your payment stub in big dark letters, write it out that payment should be applied to principal and make a copy of both the stub and your check before you send it. Always get proof. Then later, check your balance to verify that the principal was decreased by the amount that you wanted applied to it.

If you want extra payment to be applied to principal you may have to specifically state that with the payment (especially if made separate from the normal payment). You don't say what type of loan, but the only type of loan I could think of where that might happen is a car loan. I don't know if they still use rule of 78's, which I never understood, by seems to be a way of working in a prepayment penalty (you end up paying a higher effective interest rate if paid off early).

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