Paying lump sum into finance

[c3n0byt3]

Hey folks I'm trying to figure out the best finance option.
From what I understood in previous posts (just searched "finance") when you pay a lump sum at some random date into a loan you are putting money towards your original loan amount. Right?
So if I have say a loan for R100k and at some point I pay in R40k, do my premiums reflect as if I have a R60k loan?

I'm getting feedback that it doesn't work this way and I pay into the balance after interest.

 

[Ancalagon]

It depends on the loan agreement. I think with personal loans, you reduce the outstanding balance but not the interest. With vehicle loans, you reduce the capital.

I know this about vehicle loans because I did it recently.

 

[naeem]

Hey folks I'm trying to figure out the best finance option.
From what I understood in previous posts (just searched "finance") when you pay a lump sum at some random date into a loan you are putting money towards your original loan amount. Right?
So if I have say a loan for R100k and at some point I pay in R40k, do my premiums reflect as if I have a R60k loan?

I'm getting feedback that it doesn't work this way and I pay into the balance after interest.

I asked FNB a similar question on a homeloan, maybe this helps

something like an access bond?

eg
100k loan
monthly repayment - 1k

you drop a lumpsum of 40k, yes you will now owe 60k (give or take with interest, monthly payments etc)

IF you ask them to now adjust your monthly payments to reflect the new outstanding balance. Thats fine and do-able, and your monthly payments will be less (lets say R600), however the 40k cannot be withdrawn.

or

IF you pay as normal 1k a month, that 40k can be withdrawn anytime. Only difference, is you save on interest with the 40k in that loan account. This way, ever 1k you pay less interest and more toward your actual debt.

 

[c3n0byt3]

It depends on the loan agreement. I think with personal loans, you reduce the outstanding balance but not the interest. With vehicle loans, you reduce the capital.

I know this about vehicle loans because I did it recently.

So at any point in time I can only pay into the loan amount PLUS the interest amount?
In other words its better to pay a larger deposit upfront instead of putting the money in later?

 

[rietrot]

So at any point in time I can only pay into the loan amount PLUS the interest amount?
In other words its better to pay a larger deposit upfront instead of putting the money in later?

Interest gets added monthly. If you pay a loan off earlier you will save a lot of interest.

It depends on how the loan is structured, normally if it isn't a access tipe bond account you should call the financial institution and ask them to capitalise the extra amount that you are going to pay for your premiums to go down.

 

[Tinybolt]

A bulk upfront payment in excess of the normal amount due for the monthly payment reduces the outstanding capital amount of your financed loan.

Interest is calculated based on the term of the loan, interest rate and capital amount.

Reducing the capital balance outstanding (By making a bulk payment) will in-turn lower the total interest payable over the remaining term of the financing.

But in short, yes, if you make a payment in excess of that required it is made against the capital amount and not against the interest.

However if you wish to completely settle a debt such as a home loan pre notification needs to be given otherwise you could incur penalties.

 

[rietrot]

A bulk upfront payment in excess of the normal amount due for the monthly payment reduces the outstanding capital amount of your financed loan.

Interest is calculated based on the term of the loan, interest rate and capital amount.

Reducing the capital balance outstanding (By making a bulk payment) will in-turn lower the total interest payable over the remaining term of the financing.

But in short, yes, if you make a payment in excess of that required it is made against the capital amount and not against the interest.

However if you wish to completely settle a debt such as a home loan pre notification needs to be given otherwise you could incur penalties.

With some financial institutions if you make extra payments they just keep it and count it as you have payed in advance, but don't automatically deduct it from your outstanding capital. (especially for personal loans) you have to call them and ask for the advanced amount to be capitalised.

 

[piranha786]

I asked FNB a similar question on a homeloan, maybe this helps

something like an access bond?

eg
100k loan
monthly repayment - 1k

you drop a lumpsum of 40k, yes you will now owe 60k (give or take with interest, monthly payments etc)

IF you ask them to now adjust your monthly payments to reflect the new outstanding balance. Thats fine and do-able, and your monthly payments will be less (lets say R600), however the 40k cannot be withdrawn.

or

IF you pay as normal 1k a month, that 40k can be withdrawn anytime. Only difference, is you save on interest with the 40k in that loan account. This way, ever 1k you pay less interest and more toward your actual debt.

So if I understand this correctly.
Option 1.
Your monthly installment will remain the same,
Interest will be reduced
You have access to the additional funds.

Option2.
Pay in lump sum
Request it to be capitalised
My monthly installment reduCe

But the additional funds is not available anymore.