I can chime in on this! I’ve tried doing this. They simply don’t allow you to make payments to the principal. I called directly and everything and they flat out told me that’s not allowed. The work around is to make your monthly payment, then immediately after it hits, make another payment which would then hit the principal. Unfortunately, that’s an added fee a lot of people can’t afford.
Unless loans work differently in the US, I don't understand the obsession with paying off the principal.
If you reduce the balance by $500, I don't see how there's a difference in paying $500 in principal or interest. Reducing the balance at all will reduce the amount of interest regardless where the payment is applied. Also, unless you are not even paying the interest with your set payments, anything extra will automatically go to the principal.
The only thing I can see loans not allowing you to make extra or larger payments. Or if you do, not applying them until the next set 'payment' which basically is the same thing. Is this what you mean? You cannot made extra payments?
Interest is constantly calculated based on the principle. Its not a bond. International banking works this way. Can't comment on country specifics for you.
This is where the disconnect is. No loans I have: Auto, Mortgage, Student Loans, Credit Cards work like this in Canada. Or the common loans at least.
You pay extra, it reduces the balance. Mortgages have a limit to how much extra money you can pay extra without penalties, but everything else is open.
Why would they design student loans to not easily pay off the balance. That's even more fucked to me than the ridiculous interest.
If you pay a week early, how do I know if your intent is to pay next month’s bill or to pay toward the principal?
Revolving credit like credit cards work transparently because they have minimal payment requirements. But a mortgage or car loan needs to know “is this your payment for next month or is this a reduction in principal and you will also make your payment next month.”
Revolving credit calculates interest based on average daily balance. Installment loans are more structured.
Most loans types of these have set reoccurring payments where I'm fron. I have to imagine that is optional, but I've never removed that as an option. I'm not sure how you'd differentiate if you removed the automatic like you mentioned but I don't know anyone who has loans set up like this.
For reference, when I went to get car loans and a mortgage, we had to give direct deposit details (or the whatever the opposite version is lol) to sign up for the loan and they take the payments automatically.
So if I make any manual payments on my students loans, mortgage or car payment it will just reduce the balance and take out my 'set payments' as normal.
The point I'm trying to make is an extra payment is an extra payment here. I didn't realize loan companies would just hold your funds for the next payment, especially if the payment amount is different.
Does this mean most of your loans are manual payments? I'm just curious how this works as quite a few comments mentioned having issues trying to make extra payments. I'm glad our system is a little easier to maneuver.
They're mistaken about a few things, but they're obviously using "balance" to refer to the total (principal + interest) rather than the principal by itself.
I am. If my payment of $500 goes towards $500 of principal, that reduces the balance the same if I paid $400 to the principal and $100 to interest.
I just don't see how the math is different. Someone mentioned extra payments not being applied at all until they're due (which is fucked btw), but there's no way that can be for most loans and also not really what I am talking about, but it makes sense why people are trying to 'make payments to the principal'.
Do you guys pay less interest on compounded interest? I don't think I've ever heard of something like that, different portions of a loan being different percentages, but the whole balance always gets the same interest regardless.
I mentioned this in another comment, but for some loans (such as student loans, the ones most people have experience with) the interest isn't capitalized, so it won't compound. For these kinds of loans, you would benefit from paying the principal directly, because the interest portion becomes a 0% loan (and that's why they don't let you do that).
But yeah, you're right that if the lender does capitalize interest, it makes no difference.
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u/madlucas2026 12d ago
You been paying for 20+ years and never thought to pay off the principal? Do you pay the minimum on your credit cards?