Paying the Principal

[KiwiJo09]

My Husband and I bought a car about 7 months ago. It was a scary decision, but one that needed to be made. Anyways, we have been paying over the minimum every month and now we are one month ahead in our payments! Yay!

Anyways, the company says that you have to be ahead in your payments by three months in order to request to start paying on the principal. I just want to understand what that means.

Does that mean no interest will be incurred? Because it will still take time to pay down the loan, like 3 more years instead of 5. Hubby says it means that we will pay only what we owe, no interest. Can anyone explain?

[photo]

Originally Posted by KiwiJo09

Does that mean no interest will be incurred? Because it will still take time to pay down the loan, like 3 more years instead of 5. Hubby says it means that we will pay only what we owe, no interest. Can anyone explain?

It's unlikely that they will keep the loan out interest-free if it was set up originally with interest. You're still tying up their money for 3 years. However, your best bet is to contact the company and ask them directly.

[greenskeeper]

Originally Posted by KiwiJo09

My Husband and I bought a car about 7 months ago. It was a scary decision, but one that needed to be made. Anyways, we have been paying over the minimum every month and now we are one month ahead in our payments! Yay!

Anyways, the company says that you have to be ahead in your payments by three months in order to request to start paying on the principal. I just want to understand what that means.

Does that mean no interest will be incurred? Because it will still take time to pay down the loan, like 3 more years instead of 5. Hubby says it means that we will pay only what we owe, no interest. Can anyone explain?

depends how the loan is structured. A simple interest loan (I think, I'm not a banker) is that the interest is calculated and included in your monthly payment.

1st month you pay a lot of interest, and a little principal.
last month you pay a little interest, and a lot of principal.

This is because the loan balance is going down every month, interest is calculated on existing principal.

If you send in extra principal payments, that should be applied to the principal and shorten the loan.

Sounds like you have a different loan that pays the interest at first without touching the principal?

Has the principal amount on the loan gone down every month?

Again I am not a banker.

[Mr Nice Guy]

at first i thought this was going to be about paying off your child's principal of their school...need....more....coffee

[JustBill]

Originally Posted by KiwiJo09

Anyways, the company says that you have to be ahead in your payments by three months in order to request to start paying on the principal. I just want to understand what that means.

Who in the world is this lender? I want to make certain to avoid any company that has that crazy provision. Read your loan document papers to confirm what you were told. Beyond 401k loans, it is rare not to be able to pay additional monies to the outstanding principal balance. Now, in some cases, like early years of some mortgages, you may pay a small percentage penalty on the prepayment of principal.

[maat55]

It is likely you will still be paying interest every month. IMO, they are saying that you have to be three payments ahead in order to start paying down back end principle.

[Kooshiball]

I really don't understand what company said to you. Company is talking about additional principal paydown? Because payment always have two components: Principal and interest. Unless this is interest only loan, you will pay down some principal in every monthly payment (Beginning of few years, interest payment is bigger but as you are paying off the loan (As time goes), your principal payment will bigger than the interest payment.

Anyway, you really should read the loan documents and contact the lender if necessary.

[KiwiJo09]

It's a regular car loan. But any extra payments sent throughout the month don't go straight to the principal. They also involve paying interest. I read somewhere that the less than reputable company (Santander Consumer USA) will continue to make you pay interest on your loan, even if you don't have any principal left. I'm just trying to understand...

[Kooshiball]

Originally Posted by KiwiJo09

It's a regular car loan. But any extra payments sent throughout the month don't go straight to the principal. They also involve paying interest. I read somewhere that the less than reputable company (Santander Consumer USA) will continue to make you pay interest on your loan, even if you don't have any principal left. I'm just trying to understand...

Yes I do know that there is principal and interest component in regular loan. Unless what you are paying is interest only loan, it is no way that company makes you pay only in interest. So, what's your principal amount left? You can contact them to straight this thing out... Or if you can, just refinance the loan from other banks (seems very shady...)

[pdweaver]

Originally Posted by KiwiJo09

It's a regular car loan. But any extra payments sent throughout the month don't go straight to the principal. They also involve paying interest. I read somewhere that the less than reputable company (Santander Consumer USA) will continue to make you pay interest on your loan, even if you don't have any principal left. I'm just trying to understand...

What??? You have to continue to pay interest even after the loan is paid off??: That makes no sense. That means the company requires that you pay all the interest on the loan even if you pay it off early?! I would be extremely weary of a company like this. Please call them and ask them for more details. You should be able to pay off this loan without needing to pay the interest that would be due.

[jpg7n16]

Think you should read this article:

Paying extra doesn't always pay down principal on loan


And likely refi to a bank that allows you to pay extra each month and auto applies it to the balance. (no pun intended)

Did you finance through the dealer?


If you heard they can charge interest when there's no principal, whoever said that was mistaken.

But I've heard of dealers who do statement shenanigans where they front load your payments with the 'interest portion' and leave the 'principal portion' for the final payments. Essentially making you believe that you are no longer paying interest since the "interest piece" has been paid off. When all they really did was calculate how much interest you would pay over the life of the loan, and by front loading your statement, they made it seem like you were not paying interest. (which is a lie)

As long as you have a balance, they are charging interest. Once the principal balance is gone, they cannot charge you interest anymore.

[nick__45]

Dave Ramsey told us to only pay cash for cars because of situation just like this.

[HousingCounselor]

National City (now PNC) did the same thing to me. What they do is they don't apply the extra payments to the principle immediately. Rather they hold the extra amount into a suspense account. Each time your payments equal one loan payment they push back the due date by one month. However when they've accumulated enough money in the account to pay off the balance they usually will just cancel all future payments and send you your title & pay off statement.

Although you pay extra and you get your title and payoff letter early, You do not save on interest. The bank still gets the money they would've been paid even if you had made single P&I payments in the first place.

Most finance companies don't have the expensive software it takes to factor in a loan balance after an extra payment has been made. That's why some include pre-payment penalties.

[jpg7n16]

Originally Posted by HousingCounselor

Most finance companies don't have the expensive software it takes to factor in a loan balance after an extra payment has been made. That's why some include pre-payment penalties.

You mean they can't afford MS Excel?? Using the Loan amortization and Loan analysis templates - Excel - Office.com

Or the internet? http://www.bankrate.com/calculators/...alculator.aspx


Don't be fooled into thinking it takes some super complicated calculator to refigure the balance. It's a simple excel formula. If some bank told you they couldn't afford the software, they're lying.

They have penalties because they want to earn the interest rate as long as possible. Penalties deter you from prepaying, meaning they encourage you to borrow longer.

[GREENBACK]

Originally Posted by jpg7n16

They have penalties because they want to earn the interest rate as long as possible. Penalties deter you from prepaying, meaning they encourage you to borrow longer.

This should be as obvious as the nose on your face. A bank claiming otherwise is .....well, a bank being a bank!

[HousingCounselor]

Originally Posted by jpg7n16

Don't be fooled into thinking it takes some super complicated calculator to refigure the balance. It's a simple excel formula. If some bank told you they couldn't afford the software, they're lying.

They have penalties because they want to earn the interest rate as long as possible. Penalties deter you from prepaying, meaning they encourage you to borrow longer.

Whoa! I didn't say that they couldn't afford it or look elsewhere for something cheaper. They just don't want to.
They do the same thing with mortgages when you're behind on your payment. If you're so many months behind they will either reject single payments from that point on if it's not enough to cure the default or they will cash them and hold them in a suspense account and not apply them to anything except maybe taxes and ins. until they get enough to bring the mortgage current.

[amylynn]

Originally Posted by KiwiJo09

My Husband and I bought a car about 7 months ago. It was a scary decision, but one that needed to be made. Anyways, we have been paying over the minimum every month and now we are one month ahead in our payments! Yay!

Anyways, the company says that you have to be ahead in your payments by three months in order to request to start paying on the principal. I just want to understand what that means.

Does that mean no interest will be incurred? Because it will still take time to pay down the loan, like 3 more years instead of 5. Hubby says it means that we will pay only what we owe, no interest. Can anyone explain?

I made a couple of extra payments on my loan requesting they go toward principle as well. When they did not, I called. I got two answers from two different people. The first person said that the processing plant I sent my checks to is not set up to do this. When I asked for an alternate payment method that could apply my extra payments to principle only, I was told there was none.

Then I spoke with a person who told me that after the third payment, my extra payments would AUTOMATICALLY be applied to the principle. I was so frustrated that I accepted that answer and hung up the phone. Since that time, I have made eight (8) extra payments "toward the principle," none of which have actually been copletely applied to the principle as promised.

If anyone knows how I can receive some help in this matter, please let me know. I am angry at Citibank for selling me out to such a disreputable company as Santander Consumer USA. I feel helpless.

[herdjohnson]

I have my car loan through Ally (formerly GMAC). They do their paydowns in a weird way too. Instead of applying my payment only to principal, they calculate the interest from the last payment and subtract it - then the amount that goes to principal goes against my next payment. So I've been paying triple payments for the last 6 months and now if I lost my job I wouldn't owe a car payment until next January. I was a little weary about it at first, but after analyzing it in excel it's really six of one, half a dozen of another. I'm not sure if that is what is happening on your account or not though.

[Like2Plan]

Originally Posted by amylynn

I made a couple of extra payments on my loan requesting they go toward principle as well. When they did not, I called. I got two answers from two different people. The first person said that the processing plant I sent my checks to is not set up to do this. When I asked for an alternate payment method that could apply my extra payments to principle only, I was told there was none.

Then I spoke with a person who told me that after the third payment, my extra payments would AUTOMATICALLY be applied to the principle. I was so frustrated that I accepted that answer and hung up the phone. Since that time, I have made eight (8) extra payments "toward the principle," none of which have actually been copletely applied to the principle as promised.

If anyone knows how I can receive some help in this matter, please let me know. I am angry at Citibank for selling me out to such a disreputable company as Santander Consumer USA. I feel helpless.

amylynn,
Could you look around and find a credit union that you could join where you could refinance the car and pay off the original note and then not have to deal with them anymore?
Here is a link to PenFed for example: PenFedwhich is currently advertising a 1.99% used car loan rate. (You could join PenFed even if you are not military by joining National Military Family Association or Voices for America's Troops, but you may find a local credit union with an even more attractive rate.)