Making Loan Payments Towards Principal And Not Interest: Make Your Loans Disappear Faster

Ensuring that your loan payments go towards the principal is very important to make your student loans diminish faster. Learn ways to make your principal go down and managing repayment of multiple student loans.

Updated by B Harshitha on 19th February 2020

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As vexing as it can be to pay student loans on a regular basis, most borrowers are constantly appalled when they realize that a huge chunk of whatever payment they make towards their student loan debt repayment goes towards the interest. In some unfortunately anomalous cases, the interest amount may even exceed the monthly payment amount, which may come across as quite shocking. Borrowers with high interest rates can not afford to miss a single payment and over the course of time end up shelling out money in numbers unchecked.

If this application of your payments to interest continues, you may discover that your balance fails to budge in the right direction even after numerous payments, which can be distressing.

It is no secret that the interests that student loans generate is income for the involved companies. So student loan lenders are required to apply your payments to any fees that me outstanding first, then to interest and only finally to your principal amount. The scenario could be worse for you if you hold multiple loans since then, your payment will be distributed among them which will make no significant difference.

The only way you can watch your student loan debt diminish is by ensuring that a considerable portion of your payments go towards the principal. Let us learn how you can do that.

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How to apply payments on your principal balance?

Here are some things you can do to ensure that your principal balance goes down.

Be wary of late fees and lender charges 

As already mentioned, the order in which lenders pay your debt balances is:

  1. Fees

  2. Penalties

  3. Interest

  4. Principal

So any late fees or charges incurred by you, the borrower, becomes a profit for the lender and does not add to your principal.

Since they benefit from any fees or penalties, lenders will charge then at any opportunity that they can see. So be aware of your deadlines and other rules so you do not incur any additional fees.

Make extra payments whenever possible

A little extra can go a long way when it comes to student loan payments. Even amounts as small as $20, paid regularly, can make a substantial difference to your principal balance. But you have to ensure that the extra amount that you are paying is being applied to the principal. This, to state the obvious, brings down your balance. Another way in which this can be helpful is as your principal balance decreases, so does the interest being charged on that amount. Thus extra payments can bring down not only the principal balance on your student loan debts, but also the overall balance. 

Explore elsewhere for better rates

There are many student loan lenders in the market. If you have a good job and a decent credit, you may qualify for better rates offered by other lenders in the market. This is because as a graduate with a job, you pose less of a threat to lenders as compared to students. 

Refinancing your student loan could be a great idea because a lower interest rate means that your loan will generate less interest on a monthly basis. A good number of companies offer to refinance at a very low rate. This means that without changing the amount that you pay each month, you could make a big difference to your principal.

Talk to your lender

Your student loan lender might be able to help you out. You are required to know more about how lenders work. Lenders may offer deferment or forbearance on your student loans. These options will pause your student loan payments for a little bit. While this can be helpful in the present, it can be quite detrimental to your profile as a student and as an individual in a credit based system. During the period of deferment or forbearance, your interest will not stop accumulating. 

Some lenders may even offer to lower your payments and not the rate of interest. This again can be very helpful if you are facing hardship presently, but over the course of your repayment, you will end up paying a lot of money.

Nonetheless, talk to your lender and ask them if they are willing to lower your interest rate, at least for a brief period of time. 


Pick the right principal and manage your loans

As already mentioned before, lenders have a way of dealing with your payments. This is true for any extra payments that you make as well. 

They may spread your extra payments between a number of loans if you hold more than one. This is often not desirable as you will see no results on any loan. What you must do about this is clearly state that you would prefer your extra payments to go towards any one specific loan. Pick the student loan with the maximum interest rate. This can reduce interest generated to a great extent.

You might also want to ensure that your extra payments do not count toward your minimum payment for the following month.

Divide and Conquer Strategy

To manage your loans better in order to keep track of your payments, you might first want to make two lists: one with federal loans and the other with your private loans. Then make a note of all their corresponding balances and interest rates.

The debt snowball method will require you to pay off the loan with the lowest balance first and pay minimum on the others. 

The avalanche method, on the other hand, would want you to devote your payments entirely to the loan with the highest interest

Adopting any of these two methods can help you completely pay off one loan rather than not progressing on any of them.


The bottom line

Making payments on your principal is essential to ensuring that your loans get paid off faster. You may make extra payments or follow any one of the strategies mentioned to do this. Communication is key. Talk to your lender explicitly about how you would like to go forward with your repayments.