General Question

squirbel's avatar

When making payments on a debt, is it legal to request of the creditor that payments be applied to the principal only?

Asked by squirbel (3984 points ) February 25th, 2011

What are the standard practices, and what is accepted? When I refer to creditor and debtor, it is the simple relationship between one who borrowed and one who lent.

Thank you!

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7 Answers

optimisticpessimist's avatar

The contract should state whether you can pay extra payments toward principal or not, or if a pre-payment penalty will be incurred. Most reputable companies will let you pay toward the principal, thus, reducing your overall interest due. However, your question seems to ask whether you can have all of your payment go to principal and none go to interest. The answer to this is usually no, you need to pay the interest that has accrued to the point of your payment before money can be applied toward principal. I have never heard of being able to only pay principal with no interest whatsoever; they did have interest only mortgages as a big thing before the bubble burst.

I do not know the legalities of the request. Most creditors want to make sure you pay the interest because that is where they make their money. The principal is what they risked, not what they gain.

tedibear's avatar

If this is a loan through the bank, typically you can do this. For example, our regular mortgage payment is automatically debited from our checking account. In the months that we are able, I go to the bank and make an extra principal payment. I have also done this with car loans.

If you’re talking about a loan between two individuals, it will depend on the contract.

tedd's avatar

Virtually no loans or debts are set up like this.

However, if you are in dire financial times you can call your creditor and tell them your situation. Put it in no uncertain terms that if it comes down to eating, or paying their bill, eating is going to win… and you would like to see if you can do principle only payments for the time being/put a hold on additional interest.

The vast majority of creditors would rather not have to go through the hassle of having you default, sending your account to collections agencies, court processes, etc… and they will attempt to work something out with you.

tedibear's avatar

@tedd – If you set up payment arrangements like that with a bank, the money goes to the interest, not the principal. Typically, the arrangement is to make interest only payments, then when you can start paying more, the unpaid principal can then be paid upon.

perspicacious's avatar

As in a mortgage, you have to make your regular principal/interest scheduled payment but you can pay more and instruct the creditor to apply that amount to the principal. By the way, this is a smart thing to do. You cannot do this on unsecured debt generally.

squirbel's avatar

I see, thank you! Makes more sense to save up until a goal is reached than to borrow. Also, interest-only loans are pure usury!

tedd's avatar

@tedibear You are referring to graduated payment plans that many creditors offer. You CAN negotiate with them though to get principle only payments. Creditors will often allow this based on the fact that they have already got a profit coming to them from interest already accrued, and also they tend to only do it for a temporary time frame. Few creditors have programs set up like this, and it is very much a case by case scenario in which you would need to negotiate a deal with them.

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