Question about paying car loan

TMoney · #1 (**permalink**) 12-07-2006, 02:44 PM

So I'm now able to start paying more to Car loan now that credit cards are out of the way (they will be at the end of this month anyway). So my question is, when you pay more on your monthly payment, does that extra amount go to reducing your principal or principal & interest?

My loan is a 5 yr loan, but i took it with the intentions of paying it off in 2 1/2 yrs or so. Do I have to specify that I want to pay off more of the principal, or is that automatic? I assume it goes to paying the principal, but i just wanna make sure.

Thanks.

JanH · #2 (**permalink**) 12-07-2006, 02:48 PM

Good question. I've always made sure that my loans did not include a penalty for paying off early and paid extra when I could. It shortens my loan time, but I don't know if it goes on principal or what. My mortgage has a place for designating the extra as principal payments. I think my auto just adds interest each month to the balance like credit cards do and I pay on the balance that's left. I'll be interested in seeing the answer.

sweeps · #3 (**permalink**) 12-07-2006, 03:01 PM

The interest on auto loans is typically not compounded. So while paying it down reduces the amount of interest you're paying, the effect is not quite as dramatic as when paying off revolving debt (i.e. credit cards).

You should specify to the company that you are applying the extra payment to the principal, and that you're not prepaying the loan. Often "prepay" is the default option if you don't specify otherwise.

frugalmomof1 · #4 (**permalink**) 12-07-2006, 03:21 PM

Sorry if this is a stupid question...but if you are "prepaying" then you are paying, what......interest?

sweeps · #5 (**permalink**) 12-07-2006, 03:28 PM

No, it means you're making payments in advance. So if your monthly payment is $300 and you send in $600 without specifying "pay down principal", you've simply made this month's and next month's payment at once.

As you can imagine, "prepaying" is actually worse than just making the minimum payment. At least if you just paid $300, you could earn a little interest on the other $300 until you make your next car payment.

frugalmomof1 · #6 (**permalink**) 12-07-2006, 03:36 PM

Thanks....seems so obvious now

TMoney · #7 (**permalink**) 12-07-2006, 03:40 PM

So I should be contacting them and saying everytime I pay more I want it to go to paying off the principal?

disneysteve · #8 (**permalink**) 12-07-2006, 05:08 PM

Quote:

Originally Posted by TMoney

So I should be contacting them and saying everytime I pay more I want it to go to paying off the principal?

Each time you make an extra payment, I would attach a note specifying that the money should be applied to the principal.

I made this mistake years ago with my student loans. I was sending in extra payments and didn't realize they weren't going to principal until I looked at my statement one time and it said my next payment wasn't due for 7 months. They had just been applying the extra money as extra payments.

Ima saver · #9 (**permalink**) 12-07-2006, 05:12 PM

That happened to me also, when I tried to pay extra on my car payment. They just had me marked down as pre paid and that my next payment wasn't due for months. They would not let me pay extra on the principal if I remember correctly. Said they were not set up to do this. Of course, this was years ago and things have changed. Now I just save the money in a car fund and pay it off earlier.

Hypersion · #10 (**permalink**) 12-07-2006, 06:30 PM

On my car note I have to mail in principle-only payments to a different address than regular payment.

poundwise · #11 (**permalink**) 12-07-2006, 06:36 PM

You will need to contact your lender. They have differing policies on additional payments/payment amounts. One of my auto loans will accept whatever I send in above the regular payment and automatically apply the difference to the principal. The other will only accept payments that are multiples of the regular payment. That is, instead of 291.30 I can send 582.60 (291.30 x2) but I could not send, for instance, $400.00. There may be a way around that but I did not press it. In any case, the point is that you should ask your lender.

PrincessPerky · #12 (**permalink**) 12-07-2006, 08:27 PM

Doh! so thats it! we paid more on the car..the payment due went down the next month....not exactly the same as moving the due date..but prolly not paying down principle either..

gotta contact them

rduell · #13 (**permalink**) 12-08-2006, 05:29 AM

This is good to know. I just assumed the extra would go to principal. Once CC#2 is paid I'll be paying extra on the car loan. I will need to remember to contact them first now.

autoxer · #14 (**permalink**) 12-08-2006, 05:30 AM

Quote:

Originally Posted by Hypersion

On my car note I have to mail in principle-only payments to a different address than regular payment.

Me too. But at least they applied it the right way.