From time to time I have had the opportunity to speak with mortgage customers, credit card customers and customers who were in possession of checking accounts along with other financial products. I have worked in the financial industry for a number of years and sometimes it is not easy for a customer to understand some of the changes that took place concerning their own products or services. It was easy for me to explain but the customer did not always comprehend the information that I was sharing. Periodically I would have to explain to a customer why their mortgage payment increased because the annual percentage rate increased. This is why a personal loan can be great to pay down debt and your down payment more conveniently. With the constant rise in interest rates and the downfall of the economy, you can use personal loans in order to pay off your debts and thereafter clear your personal loan accordingly.
Well, when your loan was first set up you were put on a payment schedule that would allow your mortgage to pay off in 30 years provided you make your payments on time every month. Your loan is fully amortized. In other words, when you make your payments a portion of your payment will go to interest and a portion will go to principal. Since your annual percentage rate, (APR), increased a larger portion of your payment is now going towards interest.
- Balance $50,000
- Payment $500
- Interest $246
- Principal $254
- APR 6%
Notice with a balance of $50,000 and an APR of 6% the interest that accrues in a 30-day billing cycle is $246. If this loan continues as it is the balance will be paid off on the scheduled due date. Assume the APR increases to 7% because this is an adjustable-rate mortgage. The amount of interest that now accrues or accumulates is $287, approximately. This means more of your payment is going towards interest and less is going towards the principal balance. This account now has $213 going towards the balance. It will now take a longer period of time for this loan to be paid off because the balance is being reduced slower. To offset this, the payment needs to be increased to make sure enough money is still going towards the principal balance. An increase is needed to at least $541 because that is how much the principal payment was reduced by. ($254 -$213). (The increased payment is for this example only and may not be the exact payment amount needed to pay off the loan at the established due date).
Now sometimes you have to go over the information quite a few times before the customer understands exactly what is going on. Changes in terms and agreements can be confusing at times. If you signed a contract for one amount and one or two changes suddenly takes place you feel like you have been blindsided. At times it is just a matter of emphasizing the fact that the payment increased was needed so that the loan can still pay off on time.
If you have a customer in your office then you can actually print out a couple of amortization schedules which allows the customer to see the break down of principal and interest when the annual percentage rate is 6% versus 7%. This makes it a lot easier.