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Car Loan Question ... "Simple Interest"

Started by WengerTodd, December 04, 2019, 04:06:13 AM

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Hi! Hope you guys can help me. I just bought a new car in August of 2019. I now have a car loan for $25,000, and I'd like to understand the quickest way to pay it off with the least amount of interest paid.

Some variables:
-       I have the money to pay it off entirely, but it would almost totally wipe out my general savings.
-       I have no other debt except my 2 mortgages (one rental house, and primary residence)
-       Principle balance is really $24,357.81, down from $28,418.36. (2015 Ford Edge Titanium w/ 14k miles and additional 100k/10yr extended warranty)
-       Interest rate is 5.45% (because it's a used car)

When I started making payments on the loan, I didn't *really* understand what I was doing. I was told that interest is compounded daily, and that the sooner I made payments the less interest I'd be paying. So I started paying twice a month (over the past 3-4 months). I read the fine print and couldn't really make sense of it. I understood it to mean that I'd need to make 3 full payments before it started counting funds towards straight principal. I kept thinking I was doing the math wrong, so I kept making another full payment. It's December 1st, and my next payment due is June 1st... so, all it appears as though I've done is simply advanced my monthly payments. When I make the payment, there's only one field to add an amount. Original "ask" amount was ~$460, and I'd just round to $500. New minimum is now $394. When looking at the payment history, the interest charges are all over the place, from $3.87 on one, to $100 on another, with only two instances of an additional $40 being paid towards principal. One month I made 3 car payments.

If I'm understanding this properly, I think what I should have done is make substantially larger individual payments, rather than many smaller payments? E.g. "$1000 once a month rather than $500 twice a month." Before I make any more payments, can you guys confirm that this is what I should have done, and should do moving forward? Below is the bank's description of payments:

QuoteYour Retail Installment Contract is a "simple interest" contract. This means that finance charges accrue daily, beginning on the date of your contract, and are based on your Annual Percentage Rate (APR), the number of days since the last payment, and the outstanding principal balance as of the last payment. If your payments are early or more than your scheduled amount, then you may owe less in finance charges. Your payments will be applied first to finance charges, then to any late charges, then to principal balance. The formula to calculate your daily finance charge is as follows:
Daily Finance Charge = Principal Balance x APR / 365 (days a year)

Any additional amount is applied to future payments, up to the next 3 payments, unless otherwise required by law. Any remaining amounts will be applied to the principal balance owed on your account. For example: If you have a $100 payment due February 1st, and you send in $500 on February 1st, your payment will satisfy your February 1st $100 payment, your March 1st $100 payment, your April 1st $100 payment, and your May 1 $100 payment. The remaining $100 is applied to your principal account balance, and your next payment will be due June 1st.

Thank you for any advice!


I haven't had a car loan before, but with my mortgage I make my regular monthly payment, and then make separate principal-only payments to pay down my loan faster and reduce how much interest I'll pay for the remainder of my balance. You want to reduce your principal amount as quickly as you can comfortably afford to in order to save on interest over time. I suggest talking to your lender and clarifying how you can make principal-only payments separate from your monthly amounts due.


The vast majority of the payments initially are made up of interesting. You're only paying down mostly principal towards the last 3rd of the loan.

You want to pay ask them if you can pay down a large chunk in principle only. I would aim to pay down $10,000 in principle only, and then the interest portion of your monthly payments will go way down.

Pay down debt in principle chunks, not all in one go if that's all the liquidity you have. 1/3 or 1/4th at a time and reassess.



Thanks guys, I appreciate it.

I spoke to the lender on Monday. They said I can always send in "principle only" checks via regular mail. They said, "at this time, our website doesn't permit the use of principle only payments." Which is another word for saying, we'd really like to keep getting your interest payments.

What they did say is that, every individual payment I make, becomes a payment towards the proceeding month; however, any additional amount over that required amount, will go directly to principle. So, this is mostly the same thing. So what I'll do is make one large payment of $5,000 and while it will jump my next payment to July (lol...) the principle amount will be reduced by ~$4,900.

Thank you both.


So, I made another payment the other day of $2,000. I just wanted to see what would happen, and I've figured out their logic here.

Of the $2,000... they only charged me ~$53 worth of interest. This interest is because the last payment I made was a month ago, so that's normal. The rest of the money all went into principle, but... oddly enough, it still pushed back my payment by four months. So now my next payment due is in October. No additional interest was charged to me, and all the additional money for each of those months payments were completely towards principle.

I think the logic here in having them set it up this way is not to be purposely confusing, but it's more psychological. If someone sees that they don't actually have to make a payment for another 10 months... many (most?) people will probably start to slack on keeping up on the advanced payments. My assumption here is that people will let 2-3 or more months slide while they probably pay off other debts or bills. Eventually, that begins to catch up with them, and now the company regains all the interest payments they would have originally received in the first place.

So, going forward, I'm probably going to pay $1,000 to $2,000 every month, and I'll eventually end up paying it off in a year with minimal interest payments.

Total interest paid since 22 June 2019 has been $700.52. That's on a total finance of $28,418.36. Currently the balance is $22,401.92. I'm making the assumption here that if I continue to pay $1,500 (average) per month, it'll take me 15 months, and I'll probably end up paying an additional $1,400 in interest payments, for a total of $2,100 in interest having been paid, which is not awesome. So... I may elect to just do a lump sum after I've accrued more savings and feel comfortable doing so. I'm probably doing my math wrong on that... if I'm paying off principle, then the interest amount per month should conceivably be going down too?