Please Help Figuring Out a Simple Interest Equity Loan

11 years ago

Ok, I'll admit it: I'm an English major and no good at math. If anyone would be so kind to answer this in layman's terms, I'd appreciate it. I've had a traditional mortgage for many years but recently opened a low-interest equity loan with a credit union (Penfed) to pay off the balance.

In my traditional mortgage, the amount I paid was always credited the same each month. For the sake of example, say I sent in $1000. each month: $700. dollars went to principal; $300. dollars went to interest. It was completely predictable whether I sent in the payment 10 days early or 1 day early (I'm never late with a payment).

In my new equity loan, a simple interest loan calculated on a daily basis, what is applied to principal and what is applied to interest changes each month. Disconcertingly these first three months of payment (I've had the loan since Feb. 6) what is applied to principal has fallen and what is applied to interest has risen:

March 2012: payment of $1042.09; $928.07 went to principal;

$114.02 went to interest

April 2012: payment of $1042.09; $912.45 went to

principal; $129.64 went to interest

May 2012: payment of $1042.09; $883.98 went to principal;

$158.11 went to interest

My payments are due each month on the 6th of the month. I've sent each of these payments in early by a few days to a week.

I called Penfed to make sure the calculations were correct and they said yes. They said I'd soon (next month?) begin to see more go to principal than interest.

Again, if someone can explain this to me--why exactly more is going to interest each month in these initial three months--I will be grateful. I just don't understand how simple interest is calculated.

I know there is some complicated calculation with days in the month, when the payment is credited, etc., but for the life of me I can't wrap my head around it.

Sort by:Oldest

Comments (6)

Rudebekia
Original Author
11 years ago
I meant to add that this is a fixed rate loan of 2.99%.
barbcollins
11 years ago
There are less days in Feb than March.

I think you were paying interest from Feb 6 to March ? (When the payment was received). The period between the March payment and the April payment was longer.
Related Professionals
Arvada Architects & Building Designers · Troutdale Architects & Building Designers · Bell Gardens Architects & Building Designers · Brighton General Contractors · Bryn Mawr-Skyway General Contractors · Cottage Grove General Contractors · Evans General Contractors · Jacinto City General Contractors · Leon Valley General Contractors · Shorewood General Contractors · Troutdale General Contractors · Van Buren General Contractors · Wright General Contractors · Brooklyn Park Home Stagers · Mableton Home Stagers
brickeyee
11 years ago
With a simple interest loan you pay interest on a daily basis on the balance of the loan.

More days, more interest.

Fewer days, less interest.

Amortized loans compute interest based on equally spaced monthly (usually) payments.
38, 29, 30, 31 days months have no affect since it is computed monthly.

Since it averages out over the long run, it works.
Even on an amortized load the portion of the payment to interest changes every single month.

The monthly schedule makes it easier to compute long term in an amortization schedule.

Just make the payments by the due date every month and the simple interest loan will amortize in the long term the same way.
That is how they computed the payment amount, based on the same monthly amortization schedule.

Similar things happen when you pay off a monthly amortized loan early.
You will be charged day by day interest for the last payment (except some loans that can only be paid off on monthly boundaries).
weedyacres
11 years ago
Marita:
What exact days did your payment post in each of the 3 months? While what the above posters said is true, the details of the math don't seem to be adding up.

If you've got a $45,000 loan at 2.99% annually, then the interest is $3.686/day (45000 x .0299 / 365). That would indicate:
March: 31 days since last payment
April: 35 days since last payment
May: 43 days since last payment

That doesn't seem to jive with your original post. Yes, you'd expect the interest to fluctuate up and down a bit, but not by $40, and not only in the up direction.

So list your payment posting dates and let's do a bit of math with them.
brickeyee
11 years ago
And keep in mind, the date you mail the payment does not matter.

The date they receive the payment is all that matters.
ncrealestateguy
11 years ago
You can Google for a simple interest loan calculator and compare results.