Benefits to Lump Sum Payment

 

Paying a lump sum on any loans does not necessarily mean a lower monthly payment. A lump sum will decrease your principal, the total amount of your loan before interest is added. Your monthly payments remain the same, unless recalculated, and that usually includes a penalty fee.

 

Before you decide what to do with your cash win fall, there are questions you need to have answered. Is there a pre-payment penalty on your loan?  Does the loaner offer a ‘recast’ option?

 

 

Some loaners will allow a payment up to 20% on the principal.  This information was given to you at the signing. Read the find print and ask for clarification.  The pre-payment penalty is not something you would want as an added expense.

Re-cast and re-amortize both refer to the changing of the payment on a loan.  A fee is associated with this procedure.  An amount of $250.00 is possible with some being recorded up to $500.00.  Your savings must take this into account.

 

Making a lump sum payment of any amount will lower your principal.  It will not change your monthly payment.  The bank charges and will receive this set amount for the duration of your loan.  The principal amount goes down and therefore the amount of interest goes down. The term, amount of time it will take to pay off your loan, will go down because you will pay the loan off sooner. This means you will pay less on your loan in the form of less interest.

 

The banks or loaners usually allow an annual or one-time lump sum payment.  The amount you can pay is around 10% to 25% of the original loan. If you have a loan totaling $65,000, at 6%, for 180 months and give a lump sum of $10,000, the same loan term is now only 141 months and the interested saved is $22,000. (Figures rounded off)

A lump sum payment of $10,000 will reduced the term of your loan by an average of 3. ¾ years, and save you $12,000 in interest payments.

 

 

 

If you are fortune enough to come into some money, there are other possibilities to spend it on; an emergency fund is a good start. Just put the money into an interest bearing account and have it to fix the roof, new tires, braces, etc. You will not be making much money with interest, and that should not be a fact in your decision. The money becomes a security blanket.

 

There are many facts to consider when making a lump sum payment and most of them are personal. You must gather all the facts and come to your decision. You are not going to make much interest, (at this time) in a savings account, you will lower your term, but that does not give you money today.  I would reward myself first. That doesn’t mean spend the whole amount on me, treat myself to a week-end away, a dinner with theatre tickets, something that is not in my budget, then an amount lump sum payment and the rest for emergency. That way I have it all.