Abstract:
An efficient loan repayment mechanism applicable to residential property mortgage loans, or any other kind of loan, such as vehicle loans, home improvement loans, etc. Advantageously, the system and method may be utilized to more quickly repay a loan even without any increase of the out-of-pocket expense from the borrower. Preferably, a transaction account is established such that income may be immediately diverted towards prepayments of the loan, thereby decreasing the remaining principal and the associated interest accrual, and the transaction account thereafter is used to pay for ongoing expenses, typically generating or maintaining a debit balance in the transaction account. Because the principal balance of the loan is reduced as soon as possible, eliminating the interest accrual for that portion of the principal, while the payments of expenses occur relatively later (or even intentionally delayed), a net decrease in the interest expense may be realized, even if the interest charged on the transaction account debit balance is greater than the interest rate on the loan being repaid.

Description:
CROSS-REFERENCE TO RELATED APPLICATIONS  
       [0001]     The present application claims priority to Australian Provisional Application No. 2005906178, filed Nov. 9, 2005, entitled “System of Reducing Financial Repayments Using Customized Analytical Software”, which is hereby incorporated by reference herein in its entirety.  
       FIELD OF THE INVENTION  
       [0002]     The present invention relates to a method and system for loan repayment. It is particularly well suited to home mortgage loan repayments, but is applicable generally to other types of loans.  
       BACKGROUND  
       [0003]     Most homeowners or investment property owners obtain financing from a financial institution and provide a mortgage on the property as security for the loan. The debt is generally paid back to the financial institution by making periodic repayments for a predetermined number of years, depending on the terms of the loan. Similarly, other capital expenditures such as vehicle purchases (e.g., personal automobiles, recreational vehicles), home improvements (e.g., remodeling, additions) are typically made by obtaining loan proceeds from a financial institution. One problem with mortgages or other loans is that the longer it takes to repay the loan amount in full, the higher the interest amount that must also be paid in addition to the original principal loan amount.  
         [0004]     Generally, the most common solution which people have implemented in order to try to alleviate this problem is to make additional repayments or increase their periodic repayments in order to reduce the term of the loan and thus, decrease the amount of interest that will be paid. However, this is not a suitable solution to most borrowers, as people will often not be able to afford to pay any more than they are currently paying.  
         [0005]     More recently there have been attempts by individuals and financial institutions to provide a method of assisting borrowers to reduce the amount of interest payable on their existing loans or mortgages without necessarily having to increase their periodic repayments. This may involve the periodic repayments first being applied to the capital or principal sum owed rather than the interest in order to pay off the capital sum sooner, thereby reducing the interest payable. Alternatively, prior methods involve the provision of an offset account with the lender that is directly linked with the loan account. The offset account acts to reduce the amount of interest payable as the amount of savings in the offset account is “offset” against the loan amount. Therefore, interest is only payable on the loan amount minus the savings amount in the offset account. One disadvantage with these models is that simply making extra payments is not affordable for many individuals, nor do they have the necessary discipline to save money over time to make the payments. Consequently, an improvement is desired.  
       SUMMARY  
       [0006]     An improved mechanism for loan repayment is described herein. The method and apparatus is applicable to residential property mortgage loans, or any other kind of loan, such as vehicle loans, home improvement loans, etc. Advantageously, the system and method may be utilized to more quickly repay a loan. Preferably, a transaction account is established such that income may be immediately diverted towards prepayments of the loan, thereby decreasing the remaining principal and the associated interest accrual. The transaction account thereafter is used to pay for ongoing expenses, typically generating or maintaining a debit balance in the transaction account. Because the principal balance of the loan is reduced as soon as possible, eliminating the interest accrual for that portion of the principal, while the payments of expenses occur relatively later (or even intentionally delayed), a net decrease in the interest expense may be realized, even if the interest charged on the transaction account debit balance is greater than the interest rate on the loan being repaid. This differential is even greater when the transaction account receives favorable tax treatment, such as for home equity lines of credit where the accrued interest is typically tax deductible.  
         [0007]     In one embodiment, a preferred method of repaying a loan account comprises the steps of establishing a debit balance in a transaction account and then (i) repaying a portion of the debit balance with income; (ii) borrowing from the transaction account to pay expenses, the expenses including a payment on the loan; and (iii) borrowing a prepay amount from the transaction account and using the prepay amount to prepay a principal balance of the loan account.  
         [0008]     The method preferably includes only borrowing a prepay amount if it is first determined whether the debit balance is below a predetermined debit balance. This may be performed at any time, but it is desirable to account for the decrease in the debit balance associated with the repayment step (i). In other embodiments, it may also be desirable to always maintain a debit balance, thus the step of borrowing a prepay amount may be conditioned on the anticipated income and/or expenses that are scheduled to occur prior to an additional prepayment of the loan from the transaction account. This may be preferred, where, for example, the financial institution with which the transaction account is established, requires a minimum debit balance under the terms of the transaction account. The minimum debit balance may be zero or may be another value, such as $1000.  
         [0009]     In a preferred embodiment, the step of establishing a debit balance in a transaction account includes borrowing money from the transaction account to prepay a principal balance of the loan account. The amount of the prepayment (either the initial prepayment, or subsequent prepayment amounts) may be determined in a number of ways. In a preferred embodiment the prepayment amount is determined as approximately equal to some multiple of the amount by which a user&#39;s income exceeds his expenses in a given time period. In one embodiment, the time period may be one month, and the multiple is three. In this embodiment it may be possible for the user to repay to the transaction account the amount of the prepayment to the loan account in a total interval of approximately three months. Other time periods and multiples may be used to achieve any desired transaction account repayment interval, including the total interval of weeks, one month, or two months, etc. the performance of the repayment system improves as the total interval to repay the transaction account is decreased. On the other hand, as a matter of convenience users may prefer a longer interval between loan prepayments.  
         [0010]     The step of borrowing from the transaction account to pay expenses may be performed by writing checks, configuring automated transfers and auto-payments, or direct transfers or debits from the transaction account. Alternatively, the step of borrowing from the transaction account to pay expenses may be performed by aggregating expenses using one or more credit cards to pay expenses, and then paying the credit card expense from the transaction account.  
         [0011]     The system preferably is utilized such that the debit balance repayment, the expense payment, and the loan prepayment steps are performed periodically, but periodicity is not required.  
         [0012]     In an alternative preferred embodiment, prepayments of the loan account from the transaction account may be performed by notifying the account holder to make a payment from the transaction account to the loan account. As a further alternative, the prepayment may be performed by allowing the account holder to initiate transfer from a user interface, by first authenticating the account holder via an internet web interface to access the transaction account, and then presenting to the account holder a loan account principal prepayment interface from which the account holder may make a payment from the transaction account to the loan account. Preferably, the system provides the user with a recommended prepay amount.  
         [0013]     In an alternative embodiment, the method of repaying a loan account comprises the steps of establishing a transaction account to receive direct deposits of income and to disburse payments for expenses; establishing and maintaining a debit balance in the transaction account by borrowing a prepayment amount from the transaction account to prepay principal to a loan account; depositing income to the transaction account to reduce the debit balance in the transaction account; and disbursing money from the transaction account to pay expenses, thereby increasing the debit balance.  
         [0014]     In this embodiment, the step of borrowing money from the transaction account to prepay principal to a loan account is performed when a debit balance of the transaction account falls below a threshold balance. Preferably, money is borrowed from the transaction account to prepay principal to a loan account to prevent a debit balance of the transaction account to fall below a threshold balance.  
         [0015]     In some embodiments, it is desirable to maintain a debit balance in the transaction account includes borrowing an amount of money sufficiently high such that the debit balance does not fall below a threshold balance upon at least the next deposit of income to the transaction account.  
         [0016]     In yet a further alternative embodiment, the system includes a planning interface for the user. The planning interface and be used for displaying projected transaction account and loan account balances based on projected income, expenses, and prepayment amounts, and allowing for alterations in the said projected amounts. It may also display a time to loan repayment and a net interest savings over the life of the loan.  
         [0017]     In a further alternative embodiment, a preferred method of repaying a loan account comprises the steps of (i) establishing a transaction account to receive deposits of income and to disburse payments for expenses, the transaction account having an effective transaction account interest rate, (ii) receiving user income data and user expense data, and user loan data, including a loan interest rate; and, (iii) in response to the user income data and user expense data, determining future loan prepayment dates and future loan prepayment amounts to be made from the transaction account such that the effective interest rate of the transaction account is below the effective interest rate of the loan account.  
         [0018]     These as well as other aspects, advantages, and alternatives will become apparent to those of ordinary skill in the art by reading the following detailed description, with reference where appropriate to the accompanying drawings. 
     
    
     BRIEF DESCRIPTION OF THE DRAWINGS  
       [0019]      FIG. 1  is a diagram of a preferred embodiment of the loan repayment system.  
         [0020]      FIG. 2  is a functional block diagram of a preferred embodiment of the loan repayment system.  
         [0021]      FIG. 3  is an exemplary user interface depicting a transactional account ledger sheet.  
         [0022]      FIG. 4  is a chart depicting transactions in the transaction account and associated balances.  
         [0023]      FIGS. 5 and 6  are flow charts of preferred embodiments of the method of loan repayment. 
     
    
     DETAILED DESCRIPTION  
       [0024]      FIG. 1  is a diagram depicting components of a preferred loan repayment system  100 . The system  100  preferably includes a server  102  connected to a user terminal  110  by way of a network such as Internet  106  and data communication pathways  104 ,  108 . In an alternative embodiment, the system may include a communications link  114  to one or more financial institutions  112 . The data communications between and among server  102 , financial institution  112 , and user terminal  110  may be based on well-known protocols such as the hypertext transfer protocol (HTTP) and the transport control protocol/Internet protocol (TCP/IP), and further including transport layer security (TLS) or secure sockets layer (SSL). Those of skill in the art will appreciate that additional and/or alternative protocols may be used for data communications, and that links  104  and  108  may be circuit-switched connections, packet-switched connections, wired or wireless connections, etc.  
         [0025]     In a preferred embodiment, server  102  communicates with user terminal  110  by way of web pages transmitted via HTTP. The web pages may be formulated using active server pages (ASP), ASP .NET, extensible markup language (XML), and may include Java applets or other web browser plug-ins.  
         [0026]     User terminal  110  may be a personal computer, an Internet appliance, a mobile device such as a hand-held personal organizer (e.g., devices based on the Palm OS, Microsoft&#39;s CE, etc.), or a cell phone operating using a standard GSM, CDMA, WLAN, or other wireless access technology.  
         [0027]     The block diagram  200  of  FIG. 2  shows the user interface  202  connected to web server  206  via connection  204 . As discussed above, connection  204  is preferably an Internet-based connection. The web server  206  communicates with one or more databases having transaction account data. In  FIG. 2 , these databases are depicted as transaction account data  212 , and prospective transaction data  214 . The data may be stored in a single database, or may be separate databases operating under different security conditions. System  200  also includes a communication service  220  and financial analysis module  224 .  
         [0028]     The system  200  may be implemented as a stand-alone solution to provide loan repayment services and information. In this embodiment, the system would operate on a personal computer, and transaction account data  212  and prospective transaction data  214  resides on the computer, along with the user interface software  202  and the financial analysis module  224 . Alternatively, system may be implemented by financial institutions that offer the transaction account, and may be more fully integrated with the transaction account interface. In one embodiment, the transaction account data  212  may be obtained from the user by way of user interface  202  and web server  206 , which may be particularly applicable where the system  200  is a stand-alone system. Alternatively, or in addition, transaction account data  212  may be obtained from various merchants or financial institutions by way of communication service  220 , having a secure connection  222  to those entities. In this embodiment, transaction account data  212  may be downloaded directly from the financial institution that maintains the transaction account. In either embodiment, transaction account data  212  may also include other financial transaction data downloaded directly from a user&#39;s bank account, credit card account, mortgage lender, loan provider, or other institution or service.  
         [0029]     Prospective transaction data  214  is preferably obtained from the user via a user interface  202  and web server  206 . Prospective transaction data  214  may include data relating to expected income (anticipated amounts as well as date of receipt), expected expenses (amounts and dates), and anticipated loan account prepayment amounts. In a preferred embodiment, the prepayment amounts are determined by the financial analysis module  224 , but may be modified by the user through the user interface  202  and web server  206 .  
         [0030]     The system  200  is applicable to residential property mortgage loans, or any other kind of loan, such as vehicle loans, home improvement loans, etc. The web server  206  preferably provides a user interface for displaying on a user terminal  110  a transaction account ledger  300 , as shown in  FIG. 3 . The ledger  300  preferably includes individual ledgers  302  for each month. The ledger includes columns for the date  318 , the transaction description  320 , and the amount  322 . The transaction account is used to receive income as shown in row  306 , and expenses such as a car loan in row  308 , insurance payments in row  310 , home mortgage loans in row  312 , and credit card payments as shown in row  314 . For ledger  302  may also include a row showing the final balance  316 . The transaction descriptions in column  318  of  FIG. 3  are exemplary transactions, and numerous other transactions may be accommodated. Furthermore, the columns depicted in ledger  302  may be modified or otherwise altered such as by adding an additional column for displaying a running balance, for a single ledger for all months may be provided. Other variations in the transaction account ledger will be apparent to those of ordinary skill in the art.  
         [0031]     The ledger  300  may act as part of a planning interface for the user. The ledger  300  may show actual transactions, amounts, and balances (as entered by the user, or by downloading from the associated financial institution or other entity), but may also be used for displaying projected transaction account and loan account balances based on projected income, expenses, and prepayment amounts. The user may enter data directly into the ledger  300  or may be provided with alternative screens via web server  206  and user interface  202  four entering prospective transaction data.  
         [0032]     In a preferred embodiment, the user interface includes data entry screens where the user may enter income and expense data that is then used to populate the ledger  300 . In one such embodiment, one screen has income related fields including fields for salary information, dividends, interest, annuity payments, rental income, and also may include customizable fields to suit the needs of the user. The income may be scheduled periodically, or may be set as separate events to accommodate bonuses, commissions, inheritances, etc.  
         [0033]     The user&#39;s tax data, including their marginal tax rate, is preferably included. In a preferred embodiment, the system may allow the user to select an estimate of the inflation rate to be used in projecting data and related financial analysis.  
         [0034]     The preferred system includes an expense entry screen to accommodate any expense information (and changes thereto), including housing costs, entertainment, food, utilities and any other typical budgeted expense. The amounts may be entered as monthly or yearly amounts, or may be individual events/payments scheduled for specific dates, such as may be the case for shorter term debts, loans, large credit card purchases, scheduled home maintenance expenses, etc.  
         [0035]     A separate insurance related screen may be provided to account for any insurance premiums, or this information may be recorded on the expense input screen. An additional screen is preferably provided to allow entry of existing mortgage information, including the principal balance, interest rate, and other terms of the loan.  
         [0036]     In addition, the planning interface may display a time-to-repayment of the loan and a net interest savings over the life of the loan. Additional reporting and analysis tools may also be provided, as is well known in the art. The planning interface gives the user the ability to generate a plan, preferably on a month to month basis. The planning interface allows the user to change the various parameters described above associated with managing the transaction account. The user may then recalculate a revised time-to-repayment, net interest rate of the loan, and net interest savings over the life of the loan. The recalculation also provides updated budget information in ledger  300 . Preferably, the user can customize views, change transaction account amounts and balances, and otherwise adjust the loan repayment plan.  
         [0037]     A preferred sequence of transactions in the transaction account will be described with respect to sequence  400  depicted in  FIG. 4 . Prepay amount  402  is an amount deducted from the transaction account and used to prepay an amount of principal of the loan to be repaid. The prepay amount  402  may be used to establish an initial debit balance in the transaction account, or may be one of many prepay amounts. Income  404  is added to the transaction account, thereby reducing the debit balance. Thereafter, expenses  406  are deducted from the transaction account, with an associated increase in the debit balance. For sake of simplicity, the expenses in  FIG. 4  are depicted as a single transaction, whereas typically numerous expense deductions will be made from the transaction account. However, in situations where the user may utilize, for example, a credit card to pay some or all of his expenses in a relevant time interval, the transaction account will typically have fewer expense transactions, and perhaps only a single expense transaction associated with paying the credit card bill.  
         [0038]     Note that the occurrence of the expenses  406  occurs just prior to the subsequent deposit of income  408 . Furthermore, it is desirable to postpone, where possible, the payment of expenses from the transaction account in order to reduce the interest on the transaction account debit balance. Expense payment postponement may be achieved by rescheduling payment due dates with various merchants, utilities (electricity, gas, phone, cable, Internet, etc.), financial institutions, or other entities, as appropriate. As mentioned above, the use of a credit card to pay expenses is also an effective way of postponing payment of expenses. Delaying the expenses is beneficial because the interest charged by the transaction account is reduced or minimized.  
         [0039]     Subsequently, as shown in  FIG. 4 , expenses  410  are subtracted from the transaction account, income  412  is added to the transaction account and expenses  414  are subtracted from the transaction account. Prior to the receipt/deposit of income  418 , prepay amount  416  is conducted from the transaction account and used to prepay an amount of the principal of the loan to be repaid. Note that if prepay amount  416  is not deducted from the transaction account, the deposit of income  418  will result in the debit balance decreasing below a minimum threshold. For certain types of transaction accounts, as determined by the terms of the account, it may be undesirable to allow the debit balance to go below a predetermined amount (e.g., a minimum balance). In various preferred embodiments, the transaction account may have a minimum balance on the order of the few thousand dollars, typically between $1000 and $3000, but may be $0. Financial institutions may impose a fee if the debit balance goes below a minimum threshold, and may close the account if the debit balance goes to zero, or becomes positive (a credit balance). In preferred embodiments, the user is notified in the event that the transaction account balance is anticipated to surpass any relevant thresholds or levels. Furthermore, the transaction account preferably will not pay interest on a credit balance, in which case the system will alert the user to prevent the transaction account from obtaining a positive balance.  
         [0040]     The system preferably is utilized such that the debit balance repayment, the expense payment, and the loan prepayment steps are performed periodically. Preferably, the period is monthly, simply because for most users most of their expenses occur on a monthly basis. However, the system may be utilized where income is received twice a month or every two weeks, and may even be used to accommodate anticipated income received at irregular intervals as may occur with independent, self-employed individuals, or where income is received based on various contingencies such as commissions or royalties on sales, etc. Thus, periodicity is not required.  
         [0041]     The amount of the prepayments  402 ,  416  (either the initial prepayment, or subsequent prepayment amounts) is preferably determined by financial analysis module  224 . In one embodiment, the prepay amount may be determined by financial simulation by the module  224  based on the user&#39;s input data. The simulation may be used to identify a prepayment amount that ensures that the effective after-tax interest rate of the transaction account is less than the effective after-tax mortgage interest rate. The simulation may also ensure that the frequency of prepayments meets the user&#39;s expectations. That is, a user may express a preference for making loan prepayments at a certain rate, such as monthly, every two months, quarterly, semi-annually, etc. In one exemplary embodiment, the financial analysis module  224  determines the prepayment amount to be approximately equal to some multiple of the user&#39;s periodic income, or a multiple of the amount by which a user&#39;s income exceeds his expenses in a given time period. In the embodiment depicted in  FIG. 4 , the time period is one month, and the multiple is three. In this embodiment it may be possible for the user to repay to the transaction account the amount of the prepayment  402  to the loan account in a total interval of approximately three months. Other time periods and multiples may be used to achieve any desired transaction account repayment interval, including the total interval of some number of weeks, one month, or two months, etc.  
         [0042]     Financial analysis module  224  may also determine the amount of prepayments  402 ,  416  in part in response to the user&#39;s desired performance and his willingness to more frequently perform prepayment transactions. That is, the performance of the repayment system improves as the total interval to repay the transaction account is decreased. This is because the average balance of the transaction account will be minimized, thereby minimizing the associated transaction account interests charges. In this embodiment, the prepay amounts may be selected so that the resulting debit balances can be fully paid for (while still maintaining any necessary minimum balance) by subsequent income deposits within a single time frame. On the other hand, as a matter of convenience, users may prefer a longer interval between loan prepayments. Thus there is a trade-off between the financial performance of the transaction account and loan repayment system, versus convenience to the user and the frequency of engaging in prepayment transactions.  
         [0043]     Still further, the prepayment amounts should not exceed the amount of the user&#39;s line of credit. Preferably, a line of credit associated with the transaction account can also provide an emergency reserve for use by the user.  
         [0044]     In an embodiment shown in  FIG. 5 , a preferred method  500  of repaying a loan account comprises step  502 , establishing a debit balance in a transaction account; step  504 , repaying a portion of the debit balance with income; step  506 , borrowing from the transaction account to pay expenses, the expenses including a payment on the loan; and step  508 , borrowing a prepay amount from the transaction account and using the prepay amount to prepay a principal balance of the loan account.  
         [0045]     The method  500  preferably includes only borrowing a prepay amount if it is first determined whether the debit balance is below a predetermined debit balance. This may be performed at any time, but it is desirable to account for the decrease in the debit balance associated with the repayment step  504 . In other embodiments, it may also be desirable to always maintain a debit balance, thus the step of borrowing a prepay amount may be conditioned on the anticipated income and/or expenses that are scheduled to occur prior to an additional prepayment of the loan from the transaction account. This may be preferred, where, for example, the financial institution with which the transaction account is established, requires a minimum debit balance under the terms of the transaction account. The minimum debit balance may be zero or may be another value, such as $1000, $2000, etc.  
         [0046]     In a preferred embodiment, the step  502  of establishing a debit balance in a transaction account includes borrowing money from the transaction account to prepay a principal balance of the loan account. The step  506  of borrowing from the transaction account to pay expenses may be performed by writing checks, configuring automated transfers and auto-payments, or direct transfers or debits from the transaction account. Alternatively, as described above, borrowing from the transaction account to pay expenses may be performed by aggregating expenses using one or more credit cards to pay expenses, and then paying the credit card expense from the transaction account.  
         [0047]     The step  504  of repaying a portion of the debit balance with income is preferably performed close in time to the step of borrowing a prepay amount from the transaction account to prepay a principal balance of the loan account. It is preferable to have the income be direct deposited to the transaction account to avoid any delay in having the funds available to the transaction account, and thereby reducing interest charges on the debit balance of the transaction account.  
         [0048]     In a preferred embodiment, the transaction account is an account where the accrued interest on the debit balance is tax deductible, or is otherwise entitled to favorable tax treatment. This may be, for example, a home equity line of credit as is well-known in the United States.  
         [0049]     In one preferred embodiment, prepayments of the loan account from the transaction account may be performed by notifying the account holder to make a payment from the transaction account to the loan account. The notification may take place via e-mail, text messaging, voice messaging, or the like. Alternatively, the prepayment may be performed by allowing the account holder to initiate transfer from a user interface. In embodiments where the transaction account is maintained by a separate financial institution, the transfer may be initiated by first authenticating the account holder with the financial institution via an internet web interface to access the transaction account, and then presenting to the account holder a loan account principal prepayment interface from which the account holder may make a payment from the transaction account to the loan account. Preferably, the system provides the user with a recommended prepay amount.  
         [0050]     In an alternative embodiment shown in  FIG. 6 , the method  600  of repaying a loan account comprises step  602 , establishing a transaction account to receive direct deposits of income and to disburse payments for expenses; step  604 , establishing and maintaining a debit balance in the transaction account by borrowing a prepayment amount from the transaction account to prepay principal to a loan account; step  606 , depositing income to the transaction account to reduce the debit balance in the transaction account; and step  608 , disbursing money from the transaction account to pay expenses, thereby increasing the debit balance.  
         [0051]     In this embodiment, the step of borrowing money from the transaction account to prepay principal to a loan account is performed when a debit balance of the transaction account falls below a threshold balance. Preferably, money is borrowed from the transaction account to prepay principal to a loan account to prevent a debit balance of the transaction account to fall below a threshold balance.  
         [0052]     Exemplary embodiments of the invention have been described above. Those skilled in the art will appreciate that changes may be made to the embodiment described without departing from the true spirit and scope of the invention as defined by the claims.