Can a lender continue to charge interest based on an old amortization schedule?

Question

I took out a loan recently for $28,000, amortized over 10 years. Payments are approximately $340 per month. I have not made my first payment yet and was wondering if I made a payment of $20,000 if the lender would have to redo the amortization schedule and start charging interest on the new balance of $8,000 or can they continue to charge interest the way the loan was originally written? Are there any laws regarding this?

There are no prepayment penalties on this loan.

Answer 1

If your loan is a "simple interest" loan (and it probably is), then you don't need a new amortization schedule. When you pay the $20,000 on your loan, just look at the existing amortization schedule and find the line where your remaining balance is $8,000. That's how your next payment will be applied. It's just as though you "skipped ahead" on the amortization schedule. You'll still only pay interest on the remaining $8,000 balance.

(I'm using round numbers in the following explanation)
In your specific example, paying $20,000 right away will make your remaining balance $8,000. Your next regular monthly payment of $340 will be almost the equivalent of payment number 95 on your loan, where $284 of your payment will be principle and $56 will be interest. If you continue to make regular monthly payments of $340, you will have about 25 payments until your loan is paid in full.

Now if for some reason your loan has a feature called "rule of 78's" that applies when you pay ahead, you will NOT gain the full benefit of paying ahead on the loan.

Answer 2

Generally if you made a prepayment, the loan payment would remain the same as originally scheduled, but a lot less of each payment would be interest than the original schedule showed since the principal would be much smaller, and they'd just charge interest on whatever the balance was at the time of future payments. And obviously the loan would be paid off in a much shorter time. Usually the lender wouldn't give you another amortization schedule, but should let you know when the final payment would be due.

Read your loan agreement though - it should say something about prepayments.