Dear Dr. Don,
Can a credit union precharge finance charges?

I took $20,000 from a home equity line of credit Dec. 21. On Jan. 20, a statement was generated showing a minimum payment due of $190 Feb. 20. I made the minimum payment Feb. 19.

The next statement from Feb. 20 showed the $190 payment received but listed all of it as a finance charge with no money going toward the repayment of principal. The current balance is still $20,000 with another $190 due March 20.

I called them because I thought it should be more like $130 interest and $60 principal. They said that since the payment was received on the 19th, the finance charge was for the period from Jan. 21 to Feb. 19. I’ve never had a loan that charged interest that way. The way I see it, they are precharging me based on when they think I will make a payment.
— Jim Jumble

Dear Jim,
The typical mortgage loan charges interest in arrears. That means that the February payment covers January’s interest expense.

The minimum payment on a home equity line of credit, known as a HELOC, at least in the early years of the loan, covers just the interest expense. That’s why your principal balance didn’t decline. The minimum payment just covered the interest expense.

On a $20,000 loan, $190 in interest expense represents a loan rate of 11.4 percent. That’s a hellacious rate when the Bankrate national average for HELOCs this past week was 6.33 percent. Do you have bad credit? Review your loan documents to see how the interest rate is determined.

I don’t see in your accounting where you paid the first month’s interest. By your accounting, you received the money in December and didn’t make your first payment until February. That’s two month’s interest.

Some loan agreements require that any payments received apply first to outstanding interest expense and then to the reduction of principal, but I don’t really see this as your situation. It’s unlikely that your lender is precharging your interest expense, and I’m certain that they’re not guesstimating when you’ll make your next payment. Sit down with a loan officer at your credit union and have them explain your loan terms and its provisions.

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