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]

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]

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]

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]

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]

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]

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]

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!