Auto Loan Question

[wgwtgb]

So I have about 14 months left on my auto loan. I have $1000.00 that I can apply to the loan this month ($ we weren't expecting to have) and I would like to pay down a bill. My first thought is the bill with the highest interest rate, which is the car. Would putting this $ towards the car decrease the amount of time I have left or just the amount that goes toward principle each month???

 

[CowboyCO]

Actually - BOTH. Since you will owe less, your principal is reduced, thus the amount of interest you owe each month is less. Plus, you have reduced the term of your loan.. Congrats!

 

[tlbwriter]

You may need to specifically tell them that you want the extra to go toward the principal. I once had a loan where any extra payment would simply be applied to next month's payment.

Another possibility is to use that money to pay off a smaller bill (if you have one that's less than $1000) and then take that money every month and apply it to your car loan.

 

[bettymae1121]

Some car loans are like mortgages, your first year or two of payments is almost all interest with only a few dollars going to the principle, and towards the end most of your payments go towards the principle and only a few dollars towards interest. If that's the case for yours, you may not save that much in interest since you've already paid most of the interest already.

To find out for sure, call the bank your car loan is through and ask for the payoff amount if you paid it off today. Compare that number to the number of payments you have left multiplied by the dollar amount, and that will tell you how much interest you'll be saving.

 

[brergnat]

You need to check with the bank of origin.

We did the same thing with a big windfall of money we got earlier this year. We were able to pay off one car completely, as well as our credit cards, but not all of the second car. We owed about $10K on it, payments at $290.07/month. I paid $8000 towards that loan, figuring it would lower our monthly payment, but it did NOT! It only changed when our "payoff" date would be, and it's now March 2011, but the monthly payment is still $290.07.

 

[tlbwriter]

You need to check with the bank of origin.

We did the same thing with a big windfall of money we got earlier this year. We were able to pay off one car completely, as well as our credit cards, but not all of the second car. We owed about $10K on it, payments at $290.07/month. I paid $8000 towards that loan, figuring it would lower our monthly payment, but it did NOT! It only changed when our "payoff" date would be, and it's now March 2011, but the monthly payment is still $290.07.

On a closed-end loan (like a car loan or mortgage) the payment will stay the same no matter how much you owe. Only revolving loans (like credit cards) have a payment that can change based on your balance.

 

[bumbershoot]

You may need to specifically tell them that you want the extra to go toward the principal. I once had a loan where any extra payment would simply be applied to next month's payment.

Another possibility is to use that money to pay off a smaller bill (if you have one that's less than $1000) and then take that money every month and apply it to your car loan.

Absolutely.

YOu're going to need to check with your specific lender.

Would putting this $ towards the car decrease the amount of time I have left or just the amount that goes toward principle each month???

That's sort of the same thing. If the 1k goes to principal, it will take down the principle by 1K, one time. You will still owe your monthly payment for the month you send in your payment.

Or you could send in the 1K, have some take care of the monthly payment which would be split into the normal interest and principal, and the rest will go to principal only.

Both of those will lower the total time it will take you to pay off the car.

Or, and this could be the default mode of your lender (it was for our Chase loan, as an example), it pre-pays future monthly payments. So if your payments are $250, that would pay four months. So you might owe zero for four months, but then you're back to normal. And you wouldn't have gained much of anything, unless you've been careful to keep the money for those monthly payments for the future payments (or for a future principal payment, or just send that money in as well).


The other poster's idea of, if you have a few smaller debts that this could pay off, and if the monthly payments on those debts add up to a good amount, you could pay off those debts with the 1000, then use those monthly debts to put, each month, towards that car loan as extra, to reduce the principal which will reduce the amount of time you have the loan.


Figure out what you *want* to do, call your lender to see what you *can* do, make sure you know of any fees to do what you want to do (with Chase, if I did an extra payment in ONE way, there was a $10 fee...if I did it in *another* way, there was no fee), and do it!

Congrats on putting the windfall towards debt! It's a great decision!

 

[cari12]

Check with your lender. Often with car loans, the extra money is put on the end of the loan so it doesn't lower your payment or decrease the interest - they still charge all of that. The only thing it will do is decrease the time it takes to pay it off.

 

[wgwtgb]

Thank you everyone!!! I am okay with my payments staying the same for the remaninder of the loan... we've paid them thusfar huh...
I may try to pay off a smaller debt as suggested. My loan is like stated in a previous post... I paid most of my interest in the first few years... so I wouldn't be saving much more than $100.00 in interest over the next 14 months. I'm sure I can find another bill with great ease!!!

 

[riley2008]

NPR did a report yesterday that I was listening to on the way home about how so many people try to pay off the smaller loans (regardless of interest rate) then pay off the larger ones. (Some Dave Ramsey fans know this as the "snowballing". Makes totally poor financial sense.

OP - you are right on paying off the loan with the highest interest rate first. Even putting the $1000 extra to the principle will save you more than paying off smaller loans first and then using those payments to apply to your car later.

Make sure that you designate that the payment is for principle and not future payments.

Here's a link to the Bankrate calculators:

http://www.bankrate.com/calculators.aspx

You can use the auto loan calculator to see how much you would save by adding the $1000 to the principle or how much you would save on adding additional $$ to each payment after paying off a maller but lower interest loan.

 

[tlbwriter]

NPR did a report yesterday that I was listening to on the way home about how so many people try to pay off the smaller loans (regardless of interest rate) then pay off the larger ones. (Some Dave Ramsey fans know this as the "snowballing". Makes totally poor financial sense.

But it often makes more sense because it can be inspiring. Having that one bill paid off can get you excited about paying other bills off. Putting all of that money on one loan that still won't be paid in full for years is not necessarily inspiring.

OP - you are right on paying off the loan with the highest interest rate first. Even putting the $1000 extra to the principle will save you more than paying off smaller loans first and then using those payments to apply to your car later.

Not necessarily. The interest on an auto loan, like the interest on a mortgage, is often (usually? always?) front-loaded, not evenly distributed through each payment. If you look at the amortization, you pay a lot more in interest with your early payments, and by the time you get to the last year of the loan, you're barely paying any interest at all. You should be able to tell (from a statement or coupon book) how much of each payment is going toward interest. If not, ask. If you're barely paying interest at this point, it makes a lot more sense to put that money toward another bill.

 

[ICF]

Check with your lender. Often with car loans, the extra money is put on the end of the loan so it doesn't lower your payment or decrease the interest - they still charge all of that. The only thing it will do is decrease the time it takes to pay it off.

I've had lots of car loans over the last 20 years and they've all decreased the monthly interst when I prepaid-- be they bank or auto company financed.

You're correct that the payment will remain the same...i.e. they arent going to refigure your payment each month based on what you now owe.

However, the interest calculated in a given month has ALWAYS been based on the current outstanding balance. So if I had a $5000 balance with $20 in interest and I paid of $1000 (vs the regular payment of $250). My interest is now figured on the $4000 balance and not as if the balance was now $4750 (as it would have been if I hadnt paid off the extra).

 

[mistysue]

Not necessarily. The interest on an auto loan, like the interest on a mortgage, is often (usually? always?) front-loaded, not evenly distributed through each payment. If you look at the amortization, you pay a lot more in interest with your early payments, and by the time you get to the last year of the loan, you're barely paying any interest at all. You should be able to tell (from a statement or coupon book) how much of each payment is going toward interest. If not, ask. If you're barely paying interest at this point, it makes a lot more sense to put that money toward another bill.

You pay interest based on the current balance. At least in every loan I've had, they can ONLY charge you current interest that has already accrued. They don't charge you future interest. No matter how much interest you are paying total for any one loan- it makes more sense to pay off $1000 they are going to charge you 15% on than $1000 they are going to charge you 10% on. (making up random interest amounts, the point is the same no matter what they are)
While this may seem counter-intuitive to you- if you actually sit down and start calculating numbers- the interest rate is more important to watch than the actual dollar amount of interest. (unless the OP has some really huge credit cards debts in which case compounded interest could mess up the whole equation)
That would be a nightmare for people who pay bills early if mortgages evenly spread out the interest!

 

[tlbwriter]

You pay interest based on the current balance. At least in every loan I've had, they can ONLY charge you current interest that has already accrued. They don't charge you future interest.

Okay, look at this. Go to http://myamortizationchart.com/auto-loan-amortization-calculator/ and enter a $20,000 loan at 7% interest for 48 months. You'll get a chart that shows you that your first payment is $362.26 principal and $116.67 interest. And your last payment is $476.15 principal and $2.78 interest. Now, maybe all auto loans don't work this way, but every auto loan I've ever had did. If you pay off your loan early, you will not be charged for the interest you haven't paid yet. But you will have already paid a disproportionate amount of interest - if your loan is halfway paid off, your interest will be more than halfway paid off. So are you saying that if you pay off your loan early, you will get a refund of that front-loaded interest that you've already paid? Because I've paid off several loans early, and the pay-off amount was always pretty close to the principal amount.

 

[mistysue]

Okay, look at this. Go to http://myamortizationchart.com/auto-loan-amortization-calculator/ and enter a $20,000 loan at 7% interest for 48 months. You'll get a chart that shows you that your first payment is $362.26 principal and $116.67 interest. And your last payment is $476.15 principal and $2.78 interest. Now, maybe all auto loans don't work this way, but every auto loan I've ever had did. If you pay off your loan early, you will not be charged for the interest you haven't paid yet. But you will have already paid a disproportionate amount of interest - if your loan is halfway paid off, your interest will be more than halfway paid off. So are you saying that if you pay off your loan early, you will get a refund of that front-loaded interest that you've already paid? Because I've paid off several loans early, and the pay-off amount was always pretty close to the principal amount.

I'm not sure if we are just having a midunderstanding, but unless you paid "points" on the loan, in most cases you aren't paying any of the interest early. You pay more interest at first because you owe more money. You can call it "front loaded" but they aren't "loading" anything- it is simply a % of the balance. They don't charge you extra interest at the beginning. Of course in the middle you have paid most of the interest- the interest on $50k is more than the interest on $10K- but you are still paying the same rate. If the interest stayed the same through the whole loan- that would mean they calculated how much you would pay if you ALWAYS paid on the due date and NEVER paid anything early then evenly divided it. That would be unfair because even if you paid the loan off early, you would have to pay the "remainder" of your interest... a % of the money you didn't owe. Does that make sense? I'm terrible at communicating so if I make no sense I'm sorry.

You don't get a refund, but if you pay off $1,000 early- you get an extra 3 months or so of NOT paying the interest on your $1,000.

 

[ICF]

Interst isn't 'front loaded' on the loan in your example. You pay more interest up front due to a higher principal balance.

In your example...

You have a monthly payment of $478.92 ($116.67 of which goes to interest). You will be required to pay that amount of $478.92 every month...regardless of any extra $$ you may send in each month. After mo 1, the payment stays $478.92, but the interest amount drops to $114.55 (due to the lower principal balance...which would now be $19,637 at the start of month 2).

If you sent in $1000 that 1st month, your 'interest paid' in month one would still be $116 but the amount to principal would be $884 (vs $362 if the minimum payment had been made). Due to this extra $ being sent in your principal (which the interest is figured on) at the start of the 2nd month is now down to $19,116. Now for the 2nd month you still have to send in $478 but the interest amount is down to (roughly) $111 that month.

The extra payment has reduced the total interest you would have paid (based on the original amortization) and also shortened the time to pay off the loan since you have paid an extra $522 at the beginning.

 

[HM]

I made extra payments on my Honda (to their loan dept). In order to do so, I had to send a check to a differnet address and stimulate that it was going toward principal. If I sent it with my regular payment, it was just deducted from the next months payment. We paid off a 60 mon loan in 16 months this way.

 

[tlbwriter]

Okay, I get it now. But I still think it's possible that the OP would save more money by putting that money toward a bill like a credit card, where the interest is building and adding to the principal (if she has that kind of debt), rather than an auto loan where the interest is not going to increase, and at this point in her loan may be rather low. OP, are any of your other debts credit cards, or are they all fixed payments?