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I want to pay off half of my high interest student loan with a lump sum.

I have 2 options when applying the payment: to apply the amount to my balance or to advance the due date (i.e. to apply towards the due amounts for the next few months).

Does it matter which option I choose if I intend to continue making monthly payments anyway? I'm leaning towards the latter so that it gives me the flexibility to not make payments if I run into any problems.

My loan is with Discover, if that matters.

Edit: The exact text for both options read:

Apply Overpayment Toward Account Balance: Payments will generally be applied first to late fees, then to accrued interest due through the day before your payment is received and the remainder to the principal balance.

Apply Overpayment To Advance Payment Due Date: By selecting this option, you are choosing to apply your overpayment proportionally to your loans in repayment and advance your next month's payment. Interest will continue to accrue on your loan and you may pay more interest over the life of the loan.

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It does matter greatly.

Applying the excess amount to principle will reduce the loan balance and as such the interest you pay with subsequent payments over the life of the loan. This is the one you should choose.

Paying advance payments only allows you to skip months of payments at a time and essentially giving the lender and interest free loan on those prepayments. While there may be a small set of circumstances this is okay, your question does not describe one.

Do the "over payment toward account balance" will make this loan go away faster and reduce your cost in interest starting next month.

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  • So does that mean the second option does not pay the amount directly against the principal immediately?
    – ganduG
    Commented Dec 7, 2016 at 15:51
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    No it doesn't. It is only applied once you are short or miss a payment. Its a terrible deal for the borrower which is why the lenders offer this option as the default.
    – Pete B.
    Commented Dec 7, 2016 at 16:04
  • and as such the interest you pay with subsequent payments over the life of the loan Like a credit card or mortgage. allows you to skip months of payments at a time Like an auto loan (well, the auto loan that I had); it didn't prevent me from paying it off early, though.
    – RonJohn
    Commented Dec 7, 2016 at 19:02

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