@mainelykim wrote:
Hello -
I have an auto loan with TD Bank. There are two payments left, but the pay off amount is $375 greater than the toal of two payments. I called to ask why this is and the service rep said that because I have paid late multiple times, TD Bank has "stretched the principal." This is not related to fees or interest. I asked if this meant that the principal was increased and the rep said it was, because I have violated the terms of the laon by paying late. Can anyone explain this concept of principal stretching to me? Thank you.
If you have a simple interest loan and you pay late, then you are going to have extra interest taken out of the payment. Your loans interest is accrued daily so because there are extra days between payments there is extra interest. For example: if the interest portion of your payment is $10/day and you pay 10 days late, that is an extra $100 toward the interest (which is $100 less toward principal). If you do this multiple times during the course of the loan, you could end up with a significant balance remaining at the end of the loan.
If you have done that multiple times and not paid in any extra principal payments, then the balance remaining is going to be higher than what was scheduled on the original loan at the time of payoff.
The way payments are applied is 1) first to late fees 2) then to interest and 3) remaining to principal. If you have made multiple late pays and the regular payment you make is not enough to cover the late fee and the interest, then not only will there be zero applied to principal (because there wasn't enough in the payment) but whatever shortage you have will be added to the principal. That is what "stretched the principal" means.
The rep that said it wasn't due to late fees or interest is technically correct because of the way the payments are applied. But you see that the late fees and interest are a direct cause of the increased principal balance.
Read your loan docs and it will tell you the order in which the payments are applied. See if you can get a copy of the payments as you made them and as they were applied. You should have your own records, but if you don't ask the TD rep to provide it to you so you can see exactly where the funds were applied.
BTW, this works in reverse too. If you make your payments early or larger than the minimum payment, then you have fewer payments to make rather than more payments.
