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.
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
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.
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.
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.
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.
"Then said I, Wisdom [is] better than strength: nevertheless the poor
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.
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.
Everyone who takes out any kind of loan should make sure that it can be
prepaid without penalty, even if they don't intend to prepay;
circumstances can change and usually getting rid of a loan is a better
deal than investing the same amount (i.e., prepaying a 10% car loan will
get you farther ahead than putting the same amount in a 3% savings account).
Harry K wrote:
HomeOwnersHub.com is a website for homeowners and building and maintenance pros. It 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.