I am adding about 30% to my monthly bill on financing for a new car. What is best?
Apply to the interest? That is what the company is doing now. Apply to the pinciple?
I have a feeling that putting it on principle is the better deal since they picked the other one. Not even sure if they will allow it the other way but wanted to see if the principle is the better way before I talk to them.
Harry K
Principal of course, as that will lower the amount of interest due. Check the terms of your load to see what options you have. It may even pay you to re-finance.
This isn't really home repair, but anyhow: better depends on your goal:
if you want to gain a little buffer by paying ahead a few months, just make two regular principle + interest payments if you want to pay less overall in the end and pay it off more quickly, apply the extra to principle. You'll end up paying less interest.
If you do a search for "amortization chart" or "amortization calculator" online, you should find some free online calculators that could let you actually see the difference between the two methods. Most of the calculators will be mortgage-related, but some can be customized for your situation.
"apply to the interest"? WTF? Is this not a fixed rate loan?
Interest is charged on outstanding balance (at least for loans that aren't scams); your payment is applied first to interest; the rest to paying down principle. If you pay down more principal that by nature reduces interest.
It sounds like you need to show your loan contract to someone with some financial knowledge.
you need to know the contract terms.
in general an overpayment should apply to reducing the principle which will reduce the next payment since interest will be a bit less.
You want to apply to principle. Applying to interest is another way of saying pre-paying the next month's payment.
Everything depends on the contract of course. Many times two checks are required -- the normal payment, and a second for the princple-only payment that is marked as such.
There are such loans. I was stuck with one in 1970. I thought I was being clever by making extra payments until a kindly bank teller told me that my extra payments weren't doing anything to the montly interest owed during the life of the contract.
IIRC, they calculated the total interest over the theoretical life of the loan, then prorated it using some arcane formula (the "Rule of
69"). The actual interest due each month was tied to the original balance but had no real connection to any instantaneous balance.I ended up putting my extra payments into an interest-bearing account until I had enough to pay off the entire balance. Payment in toto was the only option which shut off the interest payments.
O.P. has to take a good look at his contract.
Jason
Jason
Thanks to everyone. You confirmed my understanding of it but it had been so many years that I had a contract I wanted to check before proceeding.
I am talking to the company tomorrow.
Harry K
From what I understand if you plan on paying a loan off early, what you want is a 'simple interest' loan where there is no penalty for early payment. Make sure you ask: 'simple interest with no penalty.
Other types of loans may be weighted much heavier on the interest vs. principal. You pay most of the interest in the 1st year or 2, so if you pay off early it doesn't help you much. Sort of a built in penalty. Kevin
Any loan that allows prepayment of principal without penalty is favorable to the borrower, so many loans do not allow that. I suspect yours does not, so you will end up paying for a shorter period, but paying the same total amount you would have paid if you did not add to your payments. Good deal for the finance company; bad deal for you.
I would be quite surprised if they agree to change the terms of the loan. Getting another loan and paying this one off won't help, as to pay them off you will no doubt need to give them almost all the interest they would have charged you under the original terms.
I would stop making the extra payments, and put that money into savings or an investment.
Every> I am adding about 30% to my monthly bill on financing for a new car. > What is best?
I agree totally. Its another way of turning a 30 year loan into a 29 year and 11 month loan. Totally worthless and shameful for those criminals to do that. But they all do. Fuck them!
Whats worse is you don't even get interest for them holding your extra money for all this time and not applying it to anything. I mean you can't pay for something that has yet to be charged right?
I get angry when I see how companies do.
Rule of 69 is a way to front-end load a debt's interest so as to maximize the lender's return.
Here's how it works. Borrow $100 for 1 year at 20%. You owe the bank $120. If you add the number 1 throuh 12, you get 69 and this fact is used in computing how much of the total interest is paid each month. Each month, you are expected to pay $10 (120/12). Of that, how much is interest?
First month: interest: 12/69 of $10 = $1.74, principal = 10.00 - 1.74 = 8.26 Second month: interest = 11/69 of $10 = $1.59, principal = 10.00 - 1.59 =
8.41 Third month: interest = 10/69 of $10 = $1.45, etc. ... Last month: interest = 1/69 of $10 = $0.14, principal = 10.00 - 0.14 = 9.86.As you can figure out, after about the fifth month, you are borrowing the remaining balance at a dirt cheap rate and it would be foolish to pay off the loan (since you could make more by putting the money in an interest-bearing account than you would save by paying off the loan). During the last month, you are paying a measly 1.4% on the remaining balance.
Actually you described the rule of 78. The sum of the numbers
1-12 is 78 and there is a loan scheme based upon that fact. There is also a similar rule of 69, but I don't know what the differences and similarities are.HomeOwnersHub website is not affiliated with any of the manufacturers or service providers discussed here. All logos and trade names are the property of their respective owners.