General Question

JMCSD's avatar

How much is Too much (in terms of auto payment)

Asked by JMCSD (243points) June 15th, 2009 from iPhone

Hi guys and gals. I’ve been told in the past that way over paying (not like 20–30) is not a good idea as more goes towards interest anyway. I’m confused. Can anyone clarify?

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7 Answers

JMCSD's avatar

Btw, I know what “interest” is. I just don’t get how they could all of a sudden increase it…

Darwin's avatar

Depending on your loan agreement, excess payments may be credited towards interest or it may be credited towards principal. If the latter, then the loan ends up being paid off sooner and you pay less in interest overall. In some loan agreements it might be possible for the lender to still get the original amount of money in the form of interest by recalculating the interest rate if the principal drops too much.

With my mortgage I made sure that I had the option to pay directly to principal and that the interest rate could not be recalculated (it was a fixed rate loan). Thus I paid off a 30 year mortgage in 16 years.

With my cars I simply waited until I could afford to pay off the balance of the loan and did so in one swell foop. That ended the loan so I paid no further interest. The lender is not fond of that because they count on that interest income.

In other words, you need to go back and read all the fine print on your loan document to see what you agreed the lender can do.

JMCSD's avatar

Well poop… Anyway way I could just call who the loan is through and see which it ends up being?

Darwin's avatar

You can always call the lender and see what the terms are. However, I suggest you try for a response in writing, in case someone tells you something that someone else disputes. Don’t you have the original loan document somewhere, such as in the glove compartment?

JMCSD's avatar

Good point. I believe I do. I’ll be checking in. Thanks!

The_Compassionate_Heretic's avatar

I would think you’d want to pay off your loan more quickly because the faster you pay off your loan, the sooner you stop paying interest on the loan.

Without knowing the details of the loan I can’t say for certain.
I’ve always paid off my loans ASAP.

PandoraBoxx's avatar

If look at your loan documents, if there is a pre-payment penalty, it should be disclosed in the loan agreement. If you can pay a car loan off sooner, you should. It’s a depreciable asset, so it’s value is going down at the same time you are paying interest to own it. Once you pay it off, keep making “payments” to yourself into a savings account. That way, when it’s time to buy the next car, you’ll have a nice pile of cash to use with your trade-in.

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