Idea thought of when reading thread on paying over on mortgage payments: are car loan payments treated differently?

[Frosty3799]

From the mortgage loan thread I deducted that when an individual pays over their required amount on a mortgage loan, then the extra goes against principal, not interest.

Well, I was just checking my online car loan statistics, and just last week I paid two payments ahead, after already being ahead two months. Would this mean that all the money from that payment I just made should go towards pricipal? Because the online tracker shows that some of it went to pay off interest.

Is this normal (are you in the same boat when you pay ahead)?

Is there a way that I could call up and ask them to have it all applied to principal?

Thanks for the input
Josh

 

[GroundZero]

same thing aplies with a car loan.

 

[Frosty3799]

Originally posted by: GroundZero
same thing aplies with a car loan.

So why is it showing up that my additional payments are applying to interest and not juswut the principal?

 

[RossMAN]

Josh,

Yes and yes.

Your car loan is a simple interest loan. Interest is calculated on a daily basis.

So if you made a payment of $250 on 2/9, then you make a payment of $250 on 3/9 first your interest owed from 2/9 to 3/9 will be deducted from the payment, then the rest is applied towards principal.

If you made a payment of $250 on 3/11 can you tell me what would happen?

 

[Vic]

Car and other consumer lenders can (if they choose to) apply prepayments to future interest. This will be reflected on your billing statement as either a reduced payment for the following month or even as the opportunity to "miss" payments. If you pay no mind to those and consistently make your regular payment (plus additional prepayments if you wish), then you will still pay off the loan earlier and with less interest paid.

 

[Frosty3799]

Originally posted by: RossMAN
Josh,

Yes and yes.

Your car loan is a simple interest loan. Interest is calculated on a daily basis.

So if you made a payment of $250 on 2/9, then you make a payment of $250 on 3/9 first your interest owed from 2/9 to 3/9 will be deducted from the payment, then the rest is applied towards principal.

If you made a payment of $250 on 3/11 can you tell me what would happen?

RossMAN, sent you a PM about it

 

[RossMAN]

Originally posted by: Vic
Car and other consumer lenders can (if they choose to) apply prepayments to future interest. This will be reflected on your billing statement as either a reduced payment for the following month or even as the opportunity to "miss" payments. If you pay no mind to those and consistently make your regular payment (plus additional prepayments if you wish), then you will still pay off the loan earlier and with less interest paid.

Doesn't that only apply to rule of 78th's type loans?

 

[RossMAN]

Originally posted by: Frosty3799

Originally posted by: RossMAN
Josh,

Yes and yes.

Your car loan is a simple interest loan. Interest is calculated on a daily basis.

So if you made a payment of $250 on 2/9, then you make a payment of $250 on 3/9 first your interest owed from 2/9 to 3/9 will be deducted from the payment, then the rest is applied towards principal.

If you made a payment of $250 on 3/11 can you tell me what would happen?

RossMAN, sent you a PM about it

PM received.

Unfortunately since interest accrues every day you have two options, I would go with option 1:
1) Instead of making two payments, make just one large payment. The extra amount will automatically be applied towards principal.

2) Make your regular monthly payment. When you send in the additional payment, you have to specify "PRINCIPAL ONLY" otherwise it will be treated as a regular payment, thus accrued interest will be deducted from your payment first and the rest applied towards principal. There really is nothing wrong with paying a few days of interest, I wouldn't lose any sleep over it.

It's important to consistently make payments on the same day of the month, every 30 days ... then it's easier for you to see and realize how much is being applied towards principal and interest. If you pay on 2/1 then pay on 2/20 you only have 20 days of interest then when you pay on 4/1 you'll have interest from 2/20 to 4/1 which is around 40 days.

Thank goodness I no longer work in consumer loans customer service, trying to explain this to the average Joe is not easy.

 

[Frosty3799]

Ahh ok ok. I see what you are saying. The thing is, I do all my banking online, never actually sending in a payment.

Think I could call them up and ask for them to automatically receive additional payments as only principal? or would it not be likely their system could handle that?

If you dunno the answer, no worries, I will probably just go see them tomorrow about it.

Thanks for all the help.

 

[pyonir]

Originally posted by: RossMAN

Thank goodness I no longer work in consumer loans customer service, trying to explain this to the average Joe is not easy.

Wait...can you explain this again...more carefully?

 

[Vic]

Originally posted by: RossMAN

Doesn't that only apply to rule of 78th's type loans?

Nope. Maybe I'm not saying this right. If you've been making prepayments on that American Honda loan of yours, check out when your next payment is due and for how much. At one point on my Honda loan, I could miss making a payment for a year.
The point though is "could". They give you the opportunity to apply the prepayment to the future interest, but as long as you keep making your regular payments, then it is applied to the principal. Once the principal is paid off in full, they cannot charge you for any future interest that might have accrued had you not pre-paid (i.e. prepayment penalty, unless contracted).
I hope that made sense -- I got a damn cold today and my head is a little loopy. It's something that they can do on consumer loans that they can't do on 1st mortgages.

 

[RossMAN]

Originally posted by: Vic

Originally posted by: RossMAN

Doesn't that only apply to rule of 78th's type loans?

Nope. Maybe I'm not saying this right. If you've been making prepayments on that American Honda loan of yours, check out when your next payment is due and for how much. At one point on my Honda loan, I could miss making a payment for a year.
The point though is "could". They give you the opportunity to apply the prepayment to the future interest, but as long as you keep making your regular payments, then it is applied to the principal. Once the principal is paid off in full, they cannot charge you for any future interest that might have accrued had you not pre-paid (i.e. prepayment penalty, unless contracted).
I hope that made sense -- I got a damn cold today and my head is a little loopy. It's something that they can do on consumer loans that they can't do on 1st mortgages.

Ah ok gotcha I totally understand now and agree. I re-fi'd with a local CU for a much better rate (4.75% vs 10.50 Honda was charging us).

Yes we are "paid ahead" by 1.5 years and we "could" not make any additional payments until September 2005 ... however when we do make a payment 9/05 there would be massive interest $$$ due and it would defeat the whole purpose. On the flip side this is also kind of nice insurance, let's say we've been paying extra all these months. If something happens and we're unable to make the payment, we're covered for a little bit. The trick is catching back up once you get back on your feet.

Frosty3799 - It's most likely that either their internet interface and/or consumer loan system could not handle such a request, so it's not really worth pursuing. Good thinking on paying ahead, you'll save a lot of time, interest and have a free and clear title sooner than originally expected.

By paying an extra $200/mo we're shaving about 1 yr 8 months off our 2002 Honda Accord car loan. We only save $1,500 or so in the long run but I HATE CAR PAYMENTS!!! So just getting it over with is reward enough for me.