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Companies will do anything to keep you in debt

It should be simple –– paying extra towards your loans or credit cards should help you pay them down faster, but unfortunately, these companies make it hard to actually pay your principal down by burying it under red tape and extra steps. In today’s episode, Tori answers questions from our community on why companies do this and the script she used to make sure her extra payments worked for her and NOT for the loan companies.

You’ll learn:

• The difference between principal and interest

• The script Tori used to make sure her payments were being correctly applied

• Why companies try to keep you in the dark, and what your rights are as a consumer

Resources:

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Transcript:

Tori Dunlap (00:23):

Hello, Financial Feminists. I don’t know if we can include that for copyright reasons, but we’re going to do it anyway. Sue me, Tom Cruise, I dare you. All right. Hello everybody. So excited to see you back. Thank you for your support of the show as always, Financial Feminists. We appreciate you subscribing and sharing the show with your friends. And leave us a review, let us know what topics you’d like to cover, guests you’d like to see on the show, Glen and Doyle, or leave us a win sharing about how you applied something that you’ve either learned on Her First $100K, on TikTok or Instagram, or on the podcast.

(01:00):

Okay, so this fun thing happened, which was last week on TikTok, I got tagged in this lovely post and I’m going to open it to make sure I get it right. Her name is Mikayla Butler. Mikayla, if you’re listening, hello. And basically it’s that horrible sound… Can I play the sound? Is that allowed? I’m going to play the sound. Hold on. And it’s basically the sound that you use on TikTok when you’ve realized that something horrible has happened. And so this creator, Mikayla Butler, tagged Her First $100K, tagged me, in a post with that sound, and it’s her face and it says, and we’ll link it if you want to watch it, but it says, “The way I just tried to make a lump sum payment towards my student loans principal and the tellers on the phone tried to tell me I couldn’t. So I had to escalate my request. If it weren’t for Financial Talk, I wouldn’t even know what making a payment towards principal meant.” And she said, “I love Financial Talk and Her First $100K, I’m officially a money girl.” That was my Jay-Z.

(02:04):

Okay, so let’s talk about what this TikTok means, because I duetted it and explained because there were so many people in her comments and then she was tagging me in questions, and I realized that this whole topic is worthy of an episode because this is how companies keep you in debt for longer. Companies make it very, very difficult for you to pay off your debt because you being in debt makes them money. But there are strategic ways to get out of debt faster and so I want to be able to very specifically, first of all, explain what she means, explain how you can use this in your life and debunk some of the misinformation that we saw in the comments and explain that most people don’t even know this is a thing. I’m about to blow your fucking mind.

(02:57):

I also want to reiterate that this conversation is especially important because student loan repayment is starting back up at the end of this year, or really January 1st of 2023. So this is one of those episodes that is super timely right now, but will be timely for literally years to come. And if you do have debt, any kind of debt, credit cards, student loans, mortgage, car loans, medical debt, something else, this will be applicable to you. Okay. First, companies are out to make a profit, like I said before. So they’re going to put everything in your way to help them make more money. This includes making it difficult or more difficult to pay off your loan sooner. Now, we actually know that the number one reason women go into debt, and I talk about this in our book, Financial Feminist, it’s coming out soon, is that women don’t understand how a loan works. That’s the number one reason women cite for actually going into debt or going into more debt is not understanding fully how loan works.

(04:03):

Now, it’s not because women are stupid, of course not. It’s just because no one taught us this. So let me describe what makes up a loan. Loans are made up of two basic things. The first is the principal. The principal is the original amount of money you took out. It’s the money lent to a borrower, so on a loan, it’s the original amount of money. So a $10,000 loan with let’s say 10% interest is a $10,000 principal. In exchange for you getting that $10,000, loan or any loan, you’re going to have to pay what’s called interest. That’s the other part of the loan. The interest is the money that accumulates
on top of that $10,000. So if you take out that $10,000 loan with 10% interest, the principal is that $10,000 and the interest is 10%. It’s the money paid regularly at a particular rate in exchange for the money lent.

(04:59):

So for most loans, you’ll have what’s called a compounding loan. So that means that in addition to that 10% interest, the 10% interest is not just on that $10,000, which is the principal, the interest is on interest is on interest. We’ve talked about compound interest in a positive way when it comes to investing, but this is the negative side. Compound interest when you’re investing, when you are on the side where compound interest is working for you, it’s incredible. When compound interest is working against you, it’s a bad time. I think it’s Albert Einstein, I’m literally going to Google it, he’s like, “Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.” Boom. That’s literally this episode in a nutshell. Thank you, Albert Einstein.

(05:52):

So here’s where companies get a little sneaky. So let’s say you’re hoping to pay down this debt quicker, and that is actually how we work to pay off debt is we don’t want to just send in our monthly payment. So let’s say you have a $250 monthly student loan payment, to get out of debt faster, we want to send any additional money we have. Maybe that’s an extra $50 that we find in our budget, maybe, “Oh, I got a gift for my birthday,” or, “Oh, maybe I got to raise at work one time and I want to take some of that money and throw it towards my debt.” What sometimes, often, happens is that if you contribute, let’s say that extra $50, to your loan, the company is not applying that to the principal balance. They’re either applying it to the next month’s payment or they’re trying to put that $50 towards both the principal and the interest.

(06:52):

Now, that doesn’t seem like a big deal, but you want to pay down the principal of the loan so that you pay less in interest. I’m going to say that again. Instead of just throwing extra money towards the loan generally, you want to contribute any extra money you have towards specifically the principal of that loan, because if you make the original amount of money go down, well then you’re paying less interest. A general loan payment is just going to go to the principal and the interest, mostly towards the interest. You want to send any extra money towards the principal. Let me tell you how I discovered this. I took out a car loan in 2016, and it was one of those months where I had a little extra money in my budget and so in addition to my monthly payment… I was writing checks back then and I wrote a check for $50 more than my payment. What happened was, this was like November, I looked then at my December bill and my December bill was $50 cheaper. And I’m like, “What? How is that helpful?” Answer, it’s not.

(08:02):

Basically what they did was they just put that extra $50 towards the next month, and that didn’t actually do anything. Present me saved future me $50, but I was still spending $50 regardless. And I’m like, “No, I want it to go specifically towards the loan decreasing.” I went on Toyota’s website, tried to figure out how to do that. They were very sneaky. They didn’t tell me how to do it, so I had to call their customer service. I spent 20 minutes on hold and then what did they tell me? Oh, for any contributions to the principal, I have to send money to a random PO box in Iowa that they only told me the address of when I called and asked. Companies are very sneaky. They are trying to keep you in debt longer.

(08:49):

So A, they’re not going to tell you this whole, “You can pay down the principal and then you get out of debt faster.” They’re definitely not going to tell you that, but they’re also typically going to make it harder. They’re going to put hoops in front of you. They’re going to not tell you any information you need, and if you do have this information, if you do listen to Financial Feminist, they’re going to make it slightly more complicated for you. So this lovely woman on TikTok who tagged me in this post tried to do this with her student loans and they told her, “Oh, we can’t do that.” They are legally obligated to tell you how to contribute money towards just the principal. Again, going to say it one more time. They are legally obligated. So if they are being a little sketchy, if they’re being a little suspicious, escalate it. For this one time, be a Karen and be like, “Hello, can I speak to your manager, please?” And this is what Mikayla did is she had to escalate the issue in order to be able to contribute just money towards the principal.

(09:47):

This is how we get out of debt faster. But one, we have to know that we are just contributing money to the principal and we have to figure out how to actually do that. So here’s what you’re going to do. If you’re in debt and you do have a little bit of extra money to send, you’re going to call your student loan provider, your credit card provider, your mortgage provider, and you’re going to ask them, “How do I contribute to the principal of this debt?” You’re going to find the customer service line and you’re going to say, again, “How do I contribute to just the principal of this debt?” And then any extra money you have, you are going to contribute to just the principal of the debt. Getting out of debt is really difficult. This is why it feels like you’re drowning, but consistency is super important.

(10:37):

So doing everything you can to not just pay your monthly payments, the thing that’s due, but sending any extra money, even if that’s like $20 once a year, sending that specifically towards the principal is going to help you. We want to get all of our loan paperwork together and read the fine print. We want to figure out who to contact, we need to embrace our inner Karen for this one time and you need to escalate the issue. If somebody’s like, “Oh, I don’t know how to do that,” or, “Oh, you can’t do that,” you a hundred percent can and you need to just be able to talk to the right person. I’ve said it like six times, you can take a shot every time I’ve said this in this ep
isode, but again, companies are not out to help you. They’re out to keep you in debt because it makes them money. So they’re not telling you this shit. They’re definitely not telling you and they’re also not making it easy. It’s on purpose, and you’re going to have to go out of your way to do this like I did.

(11:27):

But it’s especially worth it. And you will likely have to do this for every single loan you have, car loan, student loan, even a mortgage. Let’s talk about student loans specifically. Right now, we are recording this in September of 2022, it is a great time to make sure that if you are continuing to pay your student loan payments, even though they’re in deferral for your federal loans, that all of them are going towards the principal during this pause. You may have heard this before, but this is actually a great time to pay off your federal student loans because there’s no interest accruing. So in theory, again, call to make sure, all of the money is just going to the original amount, the principal. So you’re able to make a huge amount of progress towards paying off your student debt because there is no interest.

(12:21):

And if you have private loans that have been accruing interest, try and either negotiate your interest rate or refinance. Do not refinance your federal loans. We got some questions about that on our previous student loan episode. Do not refinance your student loans. It makes you ineligible for potential student loan forgiveness. And it also wraps you up in the whole private student loan forgiveness thing. If you do have private loans, we have resources down below about either how to refinance or how to negotiate that percentage interest. With all of debt in general, specifically student loans, there is this temptation of just like, “I’m just going to ignore it.”

(12:59):

Especially with student debt it’s like, “Oh, it all get forgiven maybe, so I’m just going to hold off.” Please don’t be that person. Of course, we hope for things like student loan forgiveness and we hope that predatory companies with crazy amounts of interest have some regulation, but we are not sitting around waiting for that to happen. Do not default on your loans. Do not ignore your payments. Do not be Nick Miller from New Girl and stick all of your bills in the closet. Do not be Andy and April from Parks and Recreation and put all of your bills in the freezer. Do not be Michael Scott who decides to spend an exorbitant amount of money on bass fishing equipment, knowing he’s never going to use it. It’s a sitcom trope, apparently. Don’t be those people.

(13:48):

If you are interested in more information about how to get out of debt, about how to navigate your loans, we have a course called Debt Defeater, exactly how to understand, make a plan and pay off your debt without shame and judgment. You can use code FFdebt for 10% off. We also have an entire chapter of Financial Feminist the book about paying off debt. I also have this script that I just gave in more detail, this whole explanation of principal versus interest versus how do you pay off a loan faster and at most book sellers that is $20. And so I would love your support of the book and getting more of that information.

(14:28):

To recap this very quickly principal, the original amount of money you took out, interest is what you pay to take out that loan. To pay down a loan faster, you need to contribute any extra money towards the principal. But companies make this difficult for you. So figuring out how do you just pay money, extra money, towards the principal, is your task. Call, ask, go to their live chat. Make sure that you’re not just sending extra money to the place that you normally send your money, because that might not be actually doing much for you. To pay off our debt faster, we want to contribute any extra money we have towards the original principal as opposed to just sending it to where we normally send it. Confirm that you actually are paying that extra money towards the huge amount of money you took out in order to pay less interest.

(15:21):

Okay. So I repeated myself a lot in this episode, for good reason because A, I know it’s complicated, and B, I just really want you to understand it. There’s also a bunch of questions that we received in the TikTok videos that I’m going to answer real fast. Okay. Somebody asked if I have to make that kind of phone call every single month. If I have to call and be like, “Hi, how do I contribute to the principal?” Once you make that call once, you should know. I made that call to Toyota, they told me PO Box in Iowa, I wrote down the address, now I know where to send my money to. So in theory, you shouldn’t have to make that call every single month. They should be able to tell you once and then you know how. Somebody also commented, “It’s wild that any extra payment would even go to interest. They’re all out for your money.” Agreed. That’s the whole idea.

(16:07):

Somebody said, “I found out after paying my car loan one and a half years and paid it off two years earlier because I told them to put extra on the principal only. I only contributed an extra 10 to $20.” There you go. This other person, “By paying just towards my principal of my mortgage, I was able to take about 10 years and tens of thousands of dollars off the cost of the mortgage.” Now, I want to clarify with this comment, one, amazing, two, you still have to pay your monthly payments towards both the principal and the interest. You can’t… I mean, I don’t think you can call them and be like, “Hello, I would just like this money to go to the principal,” because you have to pay your interest in some way. I believe this person’s talking about the extra money that they sent in. I want to also clarify too that this is for compounding loans. Some loans don’t compound. Most do because it makes more money when it compounds. But that’s going to affect the situation a little bit.

(17:09):

Okay. Another comment, “When making the final payment on my student loan, so I could buy a house, I had to,” all caps, “submit for approval to pay off the principal over the interest.” So this person literally had to seemingly submit a form and then the rest of the comments are just so many people just like, “I didn’t know this. No one taught me this.” And in addition, again, this works for every kind of loan. This is credit cards, this is mortgages, is the student loans. That’s the other common question we got was like, “Does this work for credit cards?” Yes, it does. “Does it work for student…?” Yes, it does. Yes. This is how loans work. So any extra money we can contribute to the principal, that’s how we pay off the loan faster.

(17:48):

As always, thank you for being here. Financial Feminists, thank you for your support of the show. If you loved this episode, feel free to save it. This is probably one you’re going to come back to. And please, obviously it helps us for when you share the show, but this is the sort of information that no one learns and that nobody teaches people and literally the multiple TikToks I made about it went viral because no one knows this. So share this with people who you know have debt or who just need this information. I really don’t want companies who are billion, billion, billion dollar corporations to continue to profit off of you because you just don’t know. So please send this to somebody who might need it. Thank you as always for your support of the show. We appreciate you being here, and we’ll see you soon.

(18:36):

Thank you for listening to Financial Feminist, a Her First $100K podcast. Financial Feminist is hosted by me, Tori Dunlap, produced by Kristen Fields, Marketing and Administration by Karina Patel, Olivia Coning, Cherise Wade, Alena Helzer, Paulina Isaac, Sophia Cohen, Valerie Oresko, Jack Coning, and Ana Alexandra. Research by Ariel Johnson. Audio Engineering by Austin Fields. Promotional graphics by Mary Stratton. Photography by Sarah Wolfe and theme music by Jonah Cohen Sound. A huge thanks to the entire Her First $100K team and community for supporting the show. For more information about Financial Feminist, Her First $100K, our guests, episode show notes and our upcoming book, also titled Financial Feminist, visit herfirst100k.com.