Paying extra toward installment loans - is it a prepayment or paying ahead?
If someone has an installment loan with equal, fully amortizing payments, and the borrower pays extra each month, how does the creditor decide whether to apply the extra as a prepayment to principal or as "paying ahead" to the next monthly payment due? For example, if the monthly payment is 0/m due on the 1st of each month, and the borrower makes this series of payments, how does the creditor decide how to apply the extra amount each month?
Pymt Date |Pymt Amt
1/1/2000 |0 |Does this reduce the balance by an extra ?
2/1/2000 |0 |Could the B. have paid here because of the extra
| paid the previous month?
2/15/2000 | |The B. is current for Feb., so is this a prepayment
|or does it go to the 0 due for March?
3/25/2000 |0 |Is the B. paying March + extra? Or paying Mar + Apr.?
|Would the answer change if the B. owed a late fee?
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It is important to verify the terms of the loan, however, my experience has been that by default additional amounts paid will be applied to the principle balance of the loan. The full amount is still due on the next due date regardless of what I paid the previous month.
Some loans will give you the option to specify how you want additional funds applied. For a definitive answer on a specific loan I would suggest reading through any documentation that you got with the loan or contacting the lender.
It depends.
Some loans do not allow prepayments/overpayments, and then it will be simply 'piled up' and considered 'paid on time' when it becomes due.
If prepayments are allowed, it depends on the willingness (customer-friendliness) of the loaning bank - some intentionally misunderstand it if you don't specify it, and some don't - so specify it.
Note that a prepayment (or overpayment), once understood as such, does not remove the need to pay the next payment on time.
Update: if you can afford it, and if it is allowed, it is a good idea - it is typically the best investment you could make with that extra money.
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