Principal-Only Payments

We Explain How They Work; What You're Really Doing

Some Call It a Hack. We Call It Simple

HFDFCU can only set-up auto pay if you're transferring from your own HFDFCU savings account to your loan. When you joined HFDFCU, a savings account was set-up for you automatically.

Principal-Only Payments

When you make a standard payment toward a loan, a portion of what you pay is split between paying down interest and paying down principal.

Members can request to make a principal-only payment, which applies the entire payment to paying down just the principal of a loan. When you make principal-only payments, the amount owed is reduced, but the final due date of the loan does not change.

• Principal is the original borrowed amount and owed balance of a loan
• Interest is the cost of borrowing funds

Principal-only payments can only be made after your full standard monthly payment is made.

Why a Principal-Only Payment?

Many consumers learn about principal-only payments as a 'hack' to accelerate or pay down a large loan quicker (or in less time) than the original loan term. Principal-only payments are straightforward for HFDFCU and not necessarily a hack.

HFDFCU uses simple interest calculations for personal and auto loans, which means we do not penalize any prepayment (additional payments) and principal-only payments. However, it's important to understand how simple interest works.

What's Simple Interest?

With simple interest, HFDFCU calculates how much interest you owe each time a full standard monthly payment is made. We multiply the interest rate against your principal (owed) balance. Then with that interest amount, we determine how many days has passed since your last payment to arrive at a split between that amount plus a principal amount, which comes to the quoted standard monthly payment.

Sample Calculation For Simple Interest

Let's say you borrowed $1,000 at 12.00% APR with a repayment term of 12 months. Let's calculate your first payment:

1. We quote a full standard payment of $89.00 per month
2. We calculate daily interest: (Principal, $1,000) x (Annual interest rate 12.00%) ÷ (365 Days in a year) = $0.33 daily interest
3. We then calculate full standard payment: (Daily interest, $0.33) x (Days since last payment, 30) = (Next interest payment $9.90) + (Difference of next interest payment from full standard payment, $79.10) = $89.00 monthly payment

Based on this simplified example, your first full standard payment of $89.00 would be split between principal of $79.10 and interest of $9.90. And assuming a next full standard payment is made 30 days after the first, that second payment of $89.00 would be split between principal of $80.00 and interest of $9.00. Based on a simple interest loan calculation, the interest payments you make continue to reduce over the life of your loan.

Is This How It's Always Calculated?

For HFDFCU's simple interest loans, yes. On your next full standard payment, the same 3 steps above would be repeated, except Principal would change to your new outstanding balance and Days since last payment would change to how many days passed since your last payment.

• This illustrates how principal-only payments would directly reduce your Principal the next time your next full standard payment is calculated.
• This also illustrates how everyone pays less in interest by making payments early; And conversely, how you pay more in interest if you pay your loan late.

Calculation examples are for illustration and simplification purposes. For a quote of the cost of your loan, including daily interest, and future payment calculations, please contact your Loan Officer.