Maybe a dumb question. I know that works with mortgages. This is the first time ive financed a car. I’ve always paid cash for very used cars.
Anyways my loan paperwork shows the amount financed then the amount I will have paid in total at end of the loan when interest is added. I can afford to make double payments each month. Will this decrease the total amount I pay by paying it off in half the time? Or is the interest already calculated and part of the total I owe the bank double payments or not?
My car loan does not have any penalty for prepayments, and lets me make additional payment toward the principal (which does indeed reduce the amount of interest paid over the life of the loan).
If your loan terms are like mine, then making “double payments” will pay off your car loan much, much faster than just cutting the time in half. For example, assume your payment this month is 200 bucks, of which 100 is interest and 100 is principal. If you pay 400 dollars this month, you’ll still only be paying 100 in interest, but 300 will go toward the principal. You’d be making three times more progress toward settling your debt, not just twice as much.
I looked at the paperwork again. It doesn’t say if every extra dollar each month goes directly to principal but there is a box that says prepayment penalty and it is not checked. I guess I can just call the loan officer tomorrow. Mosier, is your loan situation regarding extra payments pretty much the norm though if you’re dealing with a reputable bank and not a sketchy finance company?
Quintas, check with your loan officer to be certain, but many reputable banks will allow you to pre-pay in this manner. Just be certain they apply the extra to the outstanding principle and not your next payment. The faster you reduce the principle, the less interest you’ll end up paying.
Note that interest is calculated in each payment by applying the loan’s interest rate to the outstanding principal. What doesn’t count as interest in a payment will go towards reducing the principal. With decreasing principal you’ll be paying less interest. So, yes, pay off the loan sooner and you’ll pay less interest. The easiest way to see this is by realizing that if you pay off the entire loan at any time you’ll be avoiding all future interest payments. All this assumes that there are no prepayment penalties, which is almost surely the case for your loan.
Many years ago I bought a car on hire purchase over three years. About half way through, I was made redundant (laid off) with a payment. I asked the loan company what it would cost to settle the debt, and they gave me a figure which was exactly equal to what I would pay if I carried on with the monthly payments. Naturally I rejected the offer and let the loan continue, while investing the money.
Reputable bank (Bank of the West). I’m pretty sure my loan is standard. Every car loan I’ve had has been this way. I’ve used loans to finance for three cars in my life, one from a bank, one from a credit union, and one from the dealer. All of them worked the same way, except Carmax started doing something wonky halfway through the loan. For Carmax, my payments would go toward the interest and principal, and any overpayments just pushed back the date that my next payment was due. I’m quite sure they violated the terms of the loan by making that change, but eventually I paid off the thing early anyway and didn’t end up paying all the interest predicted when the loan was originated.
Interest is one of those varying sums that makes your head hurt thinking about. But basically think of it this way: If you get a four year loan, 48 equal payments, the first payment will go (approximately) 99.8% toward interest and only a tiny amount toward principle. Each payment after that the amount going to interest decreases (slightly) and the amount going to the principle increases, again slightly. Even with just a four year car loan after the first year you’ll have only paid off a couple hundred dollars of principle.
In other words you’re paying nearly pure interest for the first few years, so if you make double payments, and make sure to specify that the extra payment is applied directly to the principle, as others have said you will pay off the loan much, much quicker than half the time. Also resist the temptation to use any ‘payment vacation’ coupons the bank may send you (they like to send them at Xmas time) as not only do skipped payments get added to the final payment amount, but you accrue extra interest on the unpaid principle during the months you skip. I had a five-year car loan, payments were $236/month, I skipped two payments early in the loan, and my final payment wound up being over $1000!
My last car loan had me so confused I gave up trying to figure it out. I found if I paid double I needed to send in payment stubs for two months if I did not I would not be a month ahead I would only have that amount taken off the principle. I paid it off about 2 years early and ended up getting a refund check for interest several months later.
Just to toss in other other thing, there’s such a thing as the “Rule of 78s,” which means the interest is more front loaded than it is with a straight amortization. That’s the way interest on some auto loans is computed.
if I wanted to buy two vehicles at a dealership on the same day, 1 brand new vehicle that cost around $32,000-$33,000 and then I wanted to purchase a used vehicle around $15,000-$16,000 would they put both vehicles into one loan? If I were to buy both cars at the same time. I will be putting $23,000 down total for both vehicle’s, bringing the balance to what’s owed on both to roughly $28,000. My credit is excellent
Why not buy the used vehicle outright, put the remaining $7-8K down on the new one, and finance the rest? If the new vehicle has a low interest rate promo going it’s sure to be better than what you can get on a used vehicle.
Not if you finance through the dealer (as a general rule). Dealer/affiliated lender financing will be individual personal loans which are secured by a security interest in the cars being purchased. If you simply took an unsecured loan from a bank, or a loan secured by some other collateral (say, home equity) then you could buy both cars on the same loan.
Plus, what SMW said: if you can buy the used car outright, just do that. And as a general rule you will get a much better deal financing through your bank or pretty much anyone else than you’ll get through the dealer.
This is really inaccurate. On a four year loan, you’re paying mostly principal right from the start. Something like 80% of the payment on a four-year loan at 5% interest is going to principal.
Plus if you default, they can repossess both vehicles and you will be left with no vehicles and more than likely still owe some money to the finance company. Better to do them separately.
Some numbers for perspective:
A 4-year (48 payment) loan of $20K @ 5% would give you a monthly payment of $460.59.
$377.25 (82%) of the first payment goes towards principal.
$83.33 (18%) of the first payment goes towards interest.
Every payment from there forward the principal portion goes up while the interest portion goes down. (The last payment is something like a $458.67/$1.91 split).
At the end of the loan you will have paid $2,108.12 in interest.
If you can make double payments every month ($921.18) not only will your loan be paid off in 23 months, you will only pay $1,007.13 in interest.
I bought one new car, and it was in 2001, so maybe I’m mistaken. But I’m pretty sure they calculated the interest up front, and prepayment would not have lowered it one bit. They decided at the start how much I was to owe over the years, and that was that. It was GMAC at a Saturn dealership, if anyone wants to correct me.