Truck loan interest question

[Lucas156]

Rather than hijacking the mortgage question thread I figured I would create my own while it was on my mind. I have been sending in extra money on my truck payment every month trying to pay it off early.
My payment is 308 a month and sometimes I send about two hundred or more a month extra. When I get my statement from the bank it shows that it charged interest to my 308 at about 50 bucks or under and to the extra payment interest of about 50 a month. Shouldn’t my extra payment be only applied to principal. I don’t understand the way they do interest I guess. Before when I was making just the minimum payts 308 the interest charge per month was about one hundred bucks so I figured it is about the same even with the extra payment.. But why does it show part of the interest charged to my extra payment?

 

[bigus_D]

Interest is charged on the outstanding principal balance of the loan (not on the amount paid). That said, I don't really understand the question... perhaps if you itemized out what exactly is on the bill...

 

[Lucas156]

For instance

June paid
7/12 $308
principal $258
interest $50
7/12 $200
principal $150
interest $50

Other months it would be
paid $308
applied to principal $208
applied to interest $100

 

[bigus_D]

So... on 7/12 the total paid to principal was 408 and the total to interest was 100.

You paid an extra $200 toward principal (150 on the "extra payment", and an extra 50 on the "first payment".

Looks like they just break it out weird. Not sure why they would do that other than their software is lame. The important part is that they aren't charging you MORE interest because you are paying more principal.

Actually, you should see your interest go down slightly each month, with a couple of possible exceptions (variable rate loan, interest accrued daily not monthly as some months are longer than others).

 

[Lucas156]

Hmmm I think you are right they just separate it out weird. The interest has gone down gradually though I know for sure. The balance is what Im worried about. I feel so stupid I got a vehicle loan and will never get one again.

 

[public servant]

I believe you have to specify that you want the entire "extra payment" applied to the principal. Otherwise they will just take it off at the end of the loan. You might call them and ask, however.

 

[hoosiertriangle]

It looks to me as though they are treating your extra payments as "pre-payments". So that after awhile you could not pay your payment for a few months and there would be no problem from the banks perspective because you pre-paid the interest and principal amount.

This should only be done if you are foreseeing an impending period of time where you can't make your regular payment. This is managing your cash flow. What it appears you want to do is to make the extra go exclusively towards principal. If the bank is just taking your extra and pre-paying, all that will happen is you will pay off your note faster, but pay the same amount of principal and interest as if you had taken the full amount of time. You should call them and ask what is going on.

To be clear, the pre-payment is pretty much best used for managing cash flow at a later period.

 

[singlestacksig]

some banks require you to state that it is principal payments..
otherwise they take it as pre payment.

 

[kludge]

^that^

 

[Lucas156]

I think you guys are right they are taking it as pre payment and I will need to call them tomorrow. On my June bill it said I was paid up until August and I was thinking what the hell is that? I am paying extra on principal to help interest go down too not just line their freakin pockets.

 

[jblomenberg16]

I think you guys are right they are taking it as pre payment and I will need to call them tomorrow. On my June bill it said I was paid up until August and I was thinking what the hell is that? I am paying extra on principal to help interest go down too not just line their freakin pockets.

Yep, you definitely have to specify the extra goes to principle. Otherwise they will treat it as a pre-payment. I had to be very clear on my mortgage and auto loan a few years back when I started paying extra principle.

 

[Lucas156]

Thanks guys I appreciate your advice. Otherwise I would be paying more on interest than I need to be.

 

[theweakerbrother]

Specify or the banks will take advantage of your extra coin...

 

[bigus_D]

I hear everybody saying that you must specify how extra funds are to be applied... This is not something I've ever done. I just send a check (actually just send a check through the online service my bank offers, so I don't even include the remitance stub). I believe that it could happen, but I've never had my extra funds applied to anything but principal and on any less than a monthly basis. I'm the kind of fellow that checks and double checks all of the bank's calculations, so I'm positive my funds have been applied as expected.

I don't mean to suggest that banks don't misapply funds, and you should certainly communicate with them if there is any question... I've just never actually seen it happen (through a lifetime of four car loans, and two different mortages).

 

[chasekerion4]

I believe you have to specify that you want the entire "extra payment" applied to the principal. Otherwise they will just take it off at the end of the loan. You might call them and ask, however.

This.

Either way you save a little money, as any payments applied now are less interest to pay later (interest amounts are based on paying your required payment only on the due date each month - so paying more at one time is less interest paid) but nearly ALL banks will require you to tell them when you make a payment that you want the additional money over your required payment to be applied to the principal.