Author Topic: Paying off car loan  (Read 3988 times)

52cents

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Paying off car loan
« on: May 05, 2013, 12:35:43 PM »
I still don't understand how making larger than required monthly payments on a car loan works. If my payment is $285pm but instead I'm paying $1425pm, it just seems to push the due date for the next payment forward 5 months.
How is all the extra money thrown at this debt making a difference to interest paid?

Any help with this would be great, Thank you...

navystache

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Re: Paying off car loan
« Reply #1 on: May 05, 2013, 12:46:43 PM »
Well if you pay 1425 this month, the next month payment is still expected.  So, the quicker you pay off the loan the less interest you are paying. 

Joel

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Re: Paying off car loan
« Reply #2 on: May 05, 2013, 12:58:45 PM »
Every additional dollar is applied to the principal. You have paid so much extra that they will allow you to not make a payment for 5 months. But your balance should be lower as a result of the extra paid off.

Use a debt paydown calculator to see how the different scenarios shorten the loan period.

52cents

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Re: Paying off car loan
« Reply #3 on: May 05, 2013, 01:06:30 PM »
I've read that sending two checks per month with 'principal only' on the second check is the way to go. There is no option to do this with paperless billing. I'm concerned that there is some small print that has me paying off the interest of the life of the loan before attacking the principal.
With my mortgage you can allocate extra payments to principal, which makes way more sense to me.
Thanks for your help, I just need it spelled out.

Another Reader

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Re: Paying off car loan
« Reply #4 on: May 05, 2013, 01:58:13 PM »
This is SOP with car loans.  The money is NOT being applied to principal.  Call the lender, get them to apply the leftover funds to the principal and ask them how to make extra principal payments in the future.

Some people, like a lot of salespeople, LIKE this idea.  When they have a big payday, they like to pay ahead on the payments.  That way they don't risk missing a payment if the commission check doesn't arrive.  Hint:  Not a lot of salespeople adhere to the MMM philosophy.

Starstuff

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Re: Paying off car loan
« Reply #5 on: May 08, 2013, 07:32:55 AM »
Make two payments. One the minimum, and the second, if a check, marked principal only, or if online, make it a few days later. Paying extra will not be applied to principal unless specified. If splitting payments doesn't work, get on the phone with customer service and don't take no for an answer. Threaten to call your state regulators and the CFPB if they won't do what you ask with your money.

Spork

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Re: Paying off car loan
« Reply #6 on: May 08, 2013, 08:17:17 AM »
Some car loans are also structured in a "creative" way...  They do the interest calculation and figure out the interest for the life of the loan, then divide by number of payments.  You then pay an equal amount of principal/interest every month for the life of the loan.  This is advantageous to the lender, as they get their interest in full NO MATTER WHAT.  Paying it off early gets you nothing.  (Toyota used to do this in the 90s.  I made that mistake once.).

Hotstreak

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Re: Paying off car loan
« Reply #7 on: May 08, 2013, 08:53:46 AM »
(I work in finance)

I have never seen anybody have a problem, in your situation, with having the loan end when they send that last payment in.  Generally they won't require you to keep making payments.. they would actually enjoy it very much if you waited 5 months, because that is a long time for them to be building interest.  However when it comes time to send in that last payment, for $200 or $1300 or however much, most lenders will go ahead and terminate the loan, send you title, etc.  HOWEVER, this does vary from lender to lender and you will want to give them a call.  Loads and loads of people make extra payments.. they will be familiar with the situation (or call right back and talk to somebody who's not new if they sound oblivious).

Most do not "hold" your payment to apply later down the road.  They apply it, but give you a large grace period before requiring you to make another payment.  If you sent them $1400 and your loan balance reflected only a minimum payment you are dealing with a different situation.. you need to call them and ask them to backdate previous payments to principle only and inquire as how to make future apply.  If that is your situation, be careful to not apply ALL of your payments to principle only, as this may cause some of your interest due to become "late" and incur a fee.  Many people at customer service centers won't have been there long enough to be familiar with how their company treats this, I recommend speaking with several people including a manager before making the change.

52cents

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Re: Paying off car loan
« Reply #8 on: May 09, 2013, 06:28:18 AM »
Thanks RobbyJ, That's very helpful. When I called, I was reassured that I was saving money by paying off the balance early. I'm not sure if I believe them. I have to read some fine print.