Understanding the Mathematics of Personal Finance

# IRREGULAR PAYMENTS

I f you decide to make a payment that is larger than your regular payment, your balance will be reduced by an extra amount. Your lender should reduce your balance, and hence the accrued interest until your loan is paid off, accordingly. Similarly, if you make a payment that is smaller than your regular payment, some corrections must be made. In this latter case, penalties might be added to the balance as well as corrections to the calculations.

Different lenders handle these situations differently. This makes it impossible for me to discuss or present a spreadsheet that will handle the general case. Instead, I ’ ll just show a couple of possibilities here. What I ’ m doing is mathematically correct, but remember that it might not apply directly to your loan.

l ’ ll use the same loan as shown in Table 3.7 і Suppose that in May 2006, I received a good income tax refund and I want to apply my newfound extra money to my loan. For payment number 10, I’ll pay \$10,000 instead of my regular \$3,134.17.

Table 3.9 The Amortization Spreadsheet with Extra Payments Inserted

 Pmt Nr Mnth Year Balance (\$) Payment (\$) Interest (\$) Tot Int/Year (\$) 0 7 2005 350,000.00 0.00 0.00 0.00 1 8 2005 348,890.00 3,134.17 2,024.17 2,024.17 2 9 2005 347,773.57 3,134.17 2,017.75 4,041.91 3 10 2005 346,650.69 3,134.17 2,011.29 6,053.20 4 11 2005 345,521.32 3,134.17 2,004.80 8,058.00 5 12 2005 344,385.42 3,134.17 1,998.26 10,056.27 6 1 2006 343,242.94 3,134.17 1,991.70 1,991.70 7 2 2006 342,093.86 3,134.17 1,985.09 3,976.78 8 3 2006 340,938.13 3,134.17 1,978.44 5,955.23 9 4 2006 339,775.72 3,134.17 1,971.76 7,926.99 10 5 2006 331,740.76 10,000.00 1,965.04 9,892.02 11 6 2006 330,588.71 3,070.62 1,918.57 11,810.59 12 7 2006 329,429.99 3,070.62 1,911.90 13,722.49 13 8 2006 328,264.57 3,070.62 1,905.20 15,627.70 14 9 2006 327,092.42 3,070.62 1,898.46 17,526.16 15 10 2006 326,984.10 2,000.00 1,891.68 19,417.85 16 11 2006 325,794.45 3,080.71 1,891.06 21,308.90 17 12 2006 324,597.93 3,080.71 1,884.18 23,193.08 18 1 2007 323,394.48 3,080.71 1,877.26 1,877.26 19 2 2007 322,184.07 3,080.71 1,870.30 3,747.56 20 3 2007 320,966.66 3,080.71 1,863.30 5,610.85

On my spreadsheet, just type \$10,000 in for the correct payment as shown in Table 3.9. (If you haven’t done it already, please take a minute and read the informa­tion in Chapter 15 on how to reestablish the original spreadsheet calculations after you’ve changed them.) As you can see, the payments after the \$10,000 payment reflect the change and correctly show the new regular payment necessary to exactly pay off the loan at the end of 180 months. The balance, interest, and total interest per year columns are also correct.

Just to show what can be done, I changed payment 15 to a payment of \$2,000.00. Again, the spreadsheet automatically corrected all of its calculations to reflect this change.

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