Minimum Payments Are Not Always Term Monthly Payments
By the time people look for a Las Vegas bankruptcy lawyer, their debts are usually unmanageable. It is simply unrealistic for them to pay down their debt within their lifetimes, or the payments are so onerous that they will have no savings when they can no longer work. They will live on Social Security, unless their creditors can garnish it, as is the case with student loans. When people take out loans, or start running up credit card balances, their main concern is to stay out of default (which is good!), but what the creditor defines as default and what’s necessary to pay down the loan are often two different figures: the monthly payment versus the minimum monthly payment. In other words, knowing the mathematical difference can save you a lot of debt, and hopefully, the need to file a Las Vegas bankruptcy later.
- Minimum monthly payments are often just figures concocted by lenders. There may be some mathematical truth to it, such as a calculation as to how many people do stop making payments entirely based on the amounts they are willing to pay. Frequently, though, it’s just a round number, say $50.00, that’s designed to give borrowers peace of mind if they can’t make the full monthly payment. The problem, though, is that paying the minimum means the remainder is recapitalized onto the loan’s principal, which then accrues additional interest. The term for this in finance is “negative amortization,” as in, the opposite of the loan being killed off.
- Monthly payments by contrast are a calculation of what payment is necessary to bring down the loan’s principal so that the loan is completely amortized by the end of the term. The good news about monthly payments is that the formula for calculating it is not hidden in a bank’s computer but is publicly available. In fact, most generic calculator programs, including Microsoft’s, allow users to enter the loan variables to generate the monthly payment. Here’s the formula:
P = Principal
I = Interest rate
T = Number of payments (time)
——— x P = Monthly Payment
1 – (1+(I/1200)) ^ -T
Here’s what a $10,000.00 loan at 5.0% interest over 10 years looks like if our payments are due once a month:
P = $10,000.00
I = 5.0%
T = 120 (10 years times 12 months)
——— x $10,000.00 = $106.07 per month
1 – (1+(5.0/1200)) ^ -(120 payments)
Notice that $106.07 per month is not a round number like a $50.00 minimum monthly payment. Importantly, if we pay less than the monthly payment, the difference is recapitalized onto the principal, meaning we have to recalculate the monthly payment to ensure the loan is paid off at the end of the loan’s term. Otherwise, it will take longer to pay off the loan. This is the power of compound interest.
The side benefit is that if you have a stable monthly income, you can create your own loan repayment schedules if you’d like. If it’s too late, though, then a Las Vegas bankruptcy lawyer is the best option. Formulas and calculators won’t tell you that the monthly payment on discharged debt is $0.00.
For more questions about bankruptcy in Las Vegas, please feel free to contact an experienced Freedom Law Firm Las Vegas bankruptcy attorney for a free initial consultation by calling 702-602-9886.