1) What is a principal reduction?
A principal reduction refers to the reduction of either the term or partially paying down the principal amount on loans and finance leases.
2) Is there a fee to process principal reduction?
No, processing of principal reduction requests are performed as a courtesy.
3) How can I apply additional payments toward my principal?
If you qualify, a minimum of three times the next payment amount due must be received. The excess amount must be clearly specified as “principal reduction.” When your payment has been received, the amount equivalent to one payment will be applied to the next due payment that is open and the excess funds will be applied to reduce the principal. Additional funds received that do not meet the criteria described above will be applied to future payments.
4) How do I qualify for a principal reduction?
You must be in good standing with no default on any contracts to qualify.
5) How often can I utilize a principal reduction?
If you qualify for a principal reduction, you can make up to two principal reduction payments per year.
6) Can a principal reduction payment be applied to finance leases and loans?
Yes, a principal reduction payment can be applied to finance leases and loans. Taxes must be taken into consideration regarding finance leases.
7) Can I use a principal reduction to reduce my payment amount each month instead of reducing the term of the loan?
Yes, either method can be utilized, however if not specified on your payment, the funds will be applied to reduce the term of the loan.
8) What is the definition of “three times the next payment amount due”?
Three times the next payment amount due refers to three times the base payment amount not including monthly billables such as taxes or insurance, etc.
- Monthly payment: $1,000
- Three times next payment: $3,000
9) How will my funds be applied that are specified as principal reduction?
If funds are specified a principal reduction the monthly payment due will be applied first and excess will be applied towards principal.
- Applied to open payment due: $1,000
- Applied to principal: $2,000
10) If I send payments that are less than three times the next payment amount due, how will the funds be applied?
Any amount less than three times the payment will be applied to payments that are currently invoiced with excess being applied towards future payments.
- Applied to open payment due: $1,000
- Applied to future payments that are not yet invoiced: $1,000
11) What is the preferred method for submitting principal reduction payments?
Any payment method in which you can specify “principal reduction” is recommended. If paying via check or wires, please specify on the memo line. If making a payment online please select the appropriate “principal reduction” drop down option, do not select “principal balance.” For phone payments, please inform your customer service representative.
12) How is my balance affected while a principal reduction is in process?
Your balance is not impacted until the principal reduction payment process is completed by a Cat Financial representative, at which time your account balance will change to reflect the new balance.
13) I made a principal reduction payment and now I can’t view my account details online, how do I receive account information?
Once a principal reduction has been completed, a new amortization schedule will be provided to the customer via mail and invoices will remain viewable online. Due to modification of the contract, the amortization schedule and automatic buyouts will no longer be available online and require manual calculation.
14) There are fewer restrictions on making a principal reduction payment at my bank, why is Cat Financial different?
Our current accounting system has certain limitations on processing principal reduction payments. We understand there may be a need for a principal reduction which is why we have the current process in place.
15) Where can I find details of a principal reduction in my contract?
The language for finance leases and loans for United States contracts can be found in one of three sections depending on when your contract began. Section 4, 5 or 22 will provide details on reducing your principal and is most often entitled “Buyer’s Promise to Pay"; "Terms of Payment” or “Buyer’s Unconditional Payment and Performance Obligations.”
16) Can you provide an example of how a principal reduction works?
If a customer sends in $6,000 or $10,000 for a principal reduction you can see the impact on the term or payment, dependent on how the customer chooses to apply funds.
Balance Remaining: $100,000
Payment Amount: $1,887.12
Term Remaining: 60 months
Minimum Amount Required to Process a Reduction on Principal
(3x payment): $5,661.37
|Principal pay down amount: $6,000
If I send in $6,000 my new term will be approximately* 56 months
If I send in $6,000 my new payment will be approximately* $1,773.90
Principal pay down amount: $10,000
If I send in $10,000 my new term will be approximately* 53 months
If I send in $10,000 my new payment will be approximately* $1,698.41
*Figures are approximations used for demonstration purposes and will vary depending on many factors including but not limited to the actual day principal pay down funds are received.