Prepayment: A Little Extra Goes A Long Way

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I saw an article the other day reminding student borrowers how important it is to make the extra loan payment money they send is actually going to pay off the principal of their loans. Believe it or not, this is a common issue—student lenders seem to have made a habit of "assuming" that your extra payment is just an early check for their benefit (one acquaintance ended up bringing her student lender to court just to get it fixed). But prepaying even a little of your principal loan amount every month is worth the battle. Whether your loan is for a car, a house or tuition, adding a little extra to the monthly check can make a huge difference in how long you are paying on that loan and how much interest you eventually pay. To illustrate the point, I've drawn up a chart for you based on a $20,000 loan at a pretty good interest rate—the point gets even more dramatic at higher interest rates— Loan Prepayment Chart

And how do you make sure that you are chipping away at the principal of your loan and not just making your lender happy with an early interest check? Write "apply to principal" in the notes of your online payment or the note line of your paper check. As long as your loan allows prepayment (and most do), the lender is legally obliged to take the money out of your principal.* Above all else, pay attention to that account balance. If the principal isn't going down as fast as it should, it's time to start complaining.

*Many lenders (though not federally guaranteed student loans) include a prepayment penalty provision in the loan terms. Check your loan documents to see if there is one and how much it is. In most cases, even with the penalty provision, prepayment is still worth your time!