Interest rate question on loans...

[blahblah99]

Suppose I get a $10,000 auto loan at 7% interest over 36 months and my minimal monthly payment is $350. If I pay the minimal every month I'll finish up the loan in 36 months and end up paying the most interest... but can I pay like $800 a month and finish up the loan in a year and pay LESS interest? How does it work?

 

[Moonbeam]

Geez I don't know but if a car loan is like a house loan I guess it would work something like this. Foy your loan you are going to pay 12600 so 2600 in interest. On a house tiyr first payment is all interest and your last all principle, so at 18 monhs it would be 50% each. If tiy pay off in one year, you save yourself all the interest you would have paid in the last two years. That's why they weight it to the front in case you do pay off. If you pain a fixed portion of the 350 as principle and interest you would save 2/3 of the interest, but paying early still saves money.

 

[CPA]

Essentially yes, but with auto loans it will come down to what type of loan you have - simple fee vs. conventional.

Use this to calculate your total interest. Make sure you hit the show amortized table down the page.

 

[Viper GTS]

Yes, you can pay extra & be done early.

You'll get a refund for any interest you paid and didn't need to (for the time you saved by paying it off early).

Viper GTS

 

[iamwiz82]

as long as you write "Apply difference to residual" on your checks you should be fine.

 

[kranky]

Assuming your loan is a "simple interest" loan and not a "rule of 78s" (aka "sum of the digits method") type loan...

Your interest is computed each month on the amount of money you still owe. Take the interest rate and divide by 12 to get the interest rate per month. Apply that interest rate to the current unpaid balance and that's the amount of interest you owe for the month.

Go here for an online calculator you can use to see exactly how the different payments work. (In your example, $10K at 7% with $800/month payments = 13 payments plus a final payment of $13.55)

Most reputable places don't offer "rule of 78s" loans any more, but you never know. Look at your loan document to see if it says anything about "rebate of interest" if you pay off early - that is the tipoff you have a "rule of 78s" loan. With that type of loan, you are essentially signing up to pay the entire loan + interest even if you pay it off early. Very, very bad.