Comments on: AskMeFi, what's AmOREtaZeeAtion?

Question: AskMeFi, what's AmOREtaZeeAtion?

hellogoodbye — Fri, 01 May 2009 23:01:26 -0800

Upon examining my student loan payments, it appears that my "interest amt last payment" numbers sometimes increase, even when I pay the same amount (more than I need to pay) on the same day of the month. What!?

I am not a math person, nor one that has been very curious about the actual calculations on accruing interest. Here are what I think are the most important facts in this situation; I know there are many variables, but I'm hoping someone can explain this to me w.o me going into all of them. That said, I'll definitely clarify if it will help accurately answer my question.
I have been paying ~60-90% more per month on my student loans than is necessary, no principal has been added, interest rate is fixed and calculated on the formula "Interest rate x current principal balance ÷ number of days in the year = daily interest". I'm pretty sure the way my loan holders calculate interest has not changed in this time period.

So, why is it that on Feb 2 09 they received my $X00, and $X1.32 of that went to paid interest, but my Mar 2 09 payment of $X00 (exact same amt as last payment) put a higher amt $X6.11 to paid interest. Shouldn't the paid interest go down, while my contribution to the principal go up? Another confusing thing, as implied above, I pay varying amounts above the amt I should each month...but I noticed that particularly when I pay $(X-1)50, the amt of interest paid shoots waaaay up from the rest of the months...even from those where I pay less than that.

When I enter my data into amortization tables assuming I'm overpaying by a consistent amt every month, the interest correspondingly goes down every month...never up, so I have been blissfully assuming that that principle applied to my specific loan situation.

Sorry if I've made this needlessly complicated OR not detailed enough, but please shed some highly informed light on this puzzle!

By: hellogoodbye

hellogoodbye — Fri, 01 May 2009 23:09:46 -0800

Erm, just noticed that I used X incorrectly... please replace the X in my X1.32 and X6.11 to a Z or whatever letter/variable you desire.

By: muddgirl

muddgirl — Fri, 01 May 2009 23:20:20 -0800

Your question is a bit confusing, so I'll answer from the other end.

For my student loans, if I owe $X per month, and I write a check for $X+Y, the bank doesn't apply that $Y to the interest. Instead, they hold on to that $Y and apply it to next month's payment. It's in the fine print, and it saves them money because they can still charge interest on the principal.

To get that $Y applied to the principal, I have to write it as a separate check, and for some loans I have to send it to a different address that specifically deals with principal-only payments.

So I think the basic point is that you're assuming that the extra $Y is being applied to the principal each month when really, it's not.

By: hellogoodbye

hellogoodbye — Fri, 01 May 2009 23:30:39 -0800

Thanks, though I do understand that the extra $Y is not being applied to the principal; it's one of the first fine print bits I read and was sad about (I see no provisions for being able to pay toward the principal). I'm wondering why my exact same payment amt on the exact same date of the month (no matter how they apply it, as long as they apply it the same way every time) would go up.

I may have figured out the $(X-1)50 issue though; the two times I've paid that have been later in the month and it seems that even 10 days makes a HUGE difference in the interest paid amt. I'm still stuck on the other issue though....

By: willnot

willnot — Fri, 01 May 2009 23:44:45 -0800

There are fewer days between Feb 02 and March 02 than there are between March 02 and April 02. Without looking too closely at the math, might that be what you're seeing?

By: hellogoodbye

hellogoodbye — Fri, 01 May 2009 23:58:37 -0800

Oh-ho! I think we're on to something, because I did think about Feb being shorter, but that wasn't projecting the extra payment ahead a month. Reading more fine print, muddgirl's point about the money applying to the next payment is true for my loan: "Partial payments received above the amount due also be credited as partially satisfying a future installment." Soooo, another day -- another dollar, or in my case, another two days -- another $4.79.
If no one comes along to say otherwise, I think I've got a grasp on it.

By: delmoi

delmoi — Sat, 02 May 2009 00:18:59 -0800

Well, also the amount should change every month, because the amount of interest goes down each month, because the principle goes down each month. So if you owe $100,000 and have $1000 payment, which is split 50/50 interest/principle, then next month you would only owe $99,500, and so the interest would just be (theoretically) $497.50 or something.

By: megatherium

megatherium — Sat, 02 May 2009 04:15:42 -0800

One other factor is the day of the week received. If the holder receives your payment on a Thursday afternoon, they may hold it over the weekend and not enter it as received until the following Monday - or Tuesday, or whenever the hell they want to. Each day they hold it, it is earning more interest. Multiply by several thousand and there is a lot of incentive to wait.

By: iminurmefi

iminurmefi — Sat, 02 May 2009 05:24:32 -0800

I'm almost sure this is a difference in the number of days per month. When I got serious about paying off my student loan, I actually managed to figure out the exact amount I was paying *per day* (including weekends!) in interest, and I saw that it could cause my amount paid toward interest to vary.

It was also a superb motivator for paying it down more quickly--when I started, I was paying around $3.50 per day in interest. I could buy myself a beer with that after work every day! Or a fancy coffee! etc etc. Every time I made an extra payment, I would re-calculate my principal and the amount of daily interest I was paying, and it was really motivating to watch it drop.

By: raf

raf — Sat, 02 May 2009 09:55:06 -0800

For what it's worth, you should call and ask about how to get them to apply the extra to principal instead of interest, since otherwise there's no point to over-paying.

By: randomstriker

randomstriker — Sat, 02 May 2009 12:54:06 -0800

For what it's worth, you should call and ask about how to get them to apply the extra to principal instead of interest, since otherwise there's no point to over-paying.

Pointless. Interest accrues on your entire current balance, which includes both the "remaining principal" and interest that has accrued since the last payment.

Best way to understand this is to look at an amortization schedule.