401k loan interest…How is this calculated?

[queenofthemadhouse]

Realizing that l may need to just speak to our 401k administrator, I’m interested in if others think my experience is ‘normal’.

I took out a 401k loan at 4.50 percent about 18 months ago for a house down payment. Biweekly payments have been made, with each payment split between principal and interest as I would expect. Interest amount going down gradually, principal amount going up gradually.

The balance of that loan was $46,300 about 4 weeks ago. We had the proceeds from our prior home, so I was going to pay it off. I sent in $46,000, because I figured it would take a pay period or two to get it credited, and I didn’t want to overpay.

They credited $32k to principal an $14k to interest. I was expecting it to be more like $45.9k to principal and $100 or less to interest ($46k * .045 / 26) is about $80.

My balance went up by the full $46k, of course, but I still have an outstanding balance of $14k, so does that mean I’ve got several more years of repayment to make?

Is that the correct way for them to handle it?

[dukeblue219]

That sounds like they didn't treat it as a prepayment of principal but rather a whole pile of regular payments made very, very early. Same happens if you write the mortgage company a big check without saying it's for principal.

Give them a call.

[the_wiki]

How much did you originally borrow and what was the original loan length?

[queenofthemadhouse]

$50k over 15 years. It does feel like they didn’t apply it as a principal payment. Payments are about $175 biweekly.

We have a form that we are supposed to send in with a lump sum payment. I’ll check the wording on that and see if there’s language on it.

Seems very strange to do that in a tax preferred account.

[Goal33]

You confused the system by not just sending the full amount.

Call them.

[the_wiki]

Yeah there’s no way you’d have $14k in interest even at full loan term. They made a mistake and you’ll need to call and have them fix it.

[Caduceus]

You should definitely call your loan administrator and check the exact amount and get them to apply it correct as soon as possible. I think the rules around 401k loan repayments require them to be level repayments, so unless you're paying it off in a lump sum early (which is allowed), I don't think you can pay off $46,000 and then $300 later. You can either make level loan repayments, or do a lump sum repayment.

As for your question about loan interest, it makes sense to wonder how to calculate the interest from the time of your last loan repayment and the date of your lump sum early repayment. To make things simple, you can simply pay principal + interest toward your next loan payment, and then do a lump sum repayment immediately. So if your next loan payment is due Dec 1, pay your usual monthly loan+interest payment that's due Dec 1, then before Dec 1, make a lump sum early repayment of the principal balance that's left after the Dec 1 payment is credited.

The way you have done it has made things unnecessarily complicated. Call your loan provider to verify the actual numbers, then get them to re-code the transaction properly.

[Caduceus]

You should definitely call your loan administrator and check the exact amount and get them to apply it correct as soon as possible. I think the rules around 401k loan repayments require them to be level repayments, so unless you're paying it off in a lump sum early (which is allowed), I don't think you can pay off $46,000 and then $300 later. You can either make level loan repayments, or do a lump sum repayment.

As for your question about loan interest, it makes sense to wonder how to calculate the interest from the time of your last loan repayment and the date of your lump sum early repayment. To make things simple, you can simply pay principal + interest toward your next loan payment, and then do a lump sum repayment immediately. So if your next loan payment is due Dec 1, pay your usual loan+interest payment that's due Dec 1, then before Dec 1, make a lump sum early repayment of the principal balance that's left after taking into account the Dec 1 payment. This will make calculation of interim interest unnecessary.

The way you have done it has made things unnecessarily complicated. Call your loan provider to verify the actual numbers, then get them to re-code the transaction properly.

[Tom_T]

Normally, with a 401K loan, your online portal has an option to "request payoff amount" along with instructions on where to send it. The payoff amount changes because of accrued interest. No different than a mortgage; you need to ask the lender the exact amount needed to pay off the loan.