Accelerated Payments

[Dennis Povloski]

What happens when someone makes larger payments to their participant loan than what the amortization schedule calls for?

Let's say that a loan is amortized over 5 years with quarterly installments, and the participant manages to pay off 50% of the loan in the first year. Do you re-amortize the balance over the remaining period?

I'm good on loan basics, but need a little advice when things fall out of the regular pattern.

Thanks!

[WDIK]

The note is not reamortized. The additional amount is applied to pay down the loan principal. The loan payments remain the same, but the loan is paid off earlier than anticipated by the amortization schedule.

[masteff]

Just make sure that the extra paydown is generally made to the plan as one or two lump sums, not as a regular recurring extra amount. This keeps from violating the substantially level payments requirement.

And some plans do provide in their loan rules that the participant has the option to reamortize the loan over remainder of the original term. So a quick review of the plan's loan rules would be good.