Question:
I have recently purchased a new car, but because I have bad credit, the loan has a very high interest rate. I was told that I can write on my payment check that I want the entire payment to go towards the loan principal. Doing this will bring down the total amount of interest I have to pay. Is this true, can I really have my payments go towards principal only?
Answers:
Auto finance is what I do for a living and the only way this will work is if you write two checks, one for your normal monthly payment and the other for whatever amount you can afford over that.
In the memo box on the lower left hand side of the second check, write "Apply to principal". That way the amount of the second check will go directly to your principal and save you interest in the long run.
You can only do that for ayments over the monthly amount.
No. You have to pay the interest every month. Some of your monthly payment goes to principal bu not much since you just bought the car. Anything you add that over the monthly payment amount will go to principle
Short answer: no.
But generally, any amounts over the monthly minimum go to the principal.
So if you usually pay $200 a month, it may split like $75 principal and $125 interest (depending on your balance and rate). If you pay $300 instead, it will go $175 to principal, $125 to interest. But you always have to pay some interest every month.
You weren't given the whole story. You normally have to make regular payments that you've agreed to, monthly, biweekly, weekly, etc. After the contractual obligation has been met for the pay period, you can make additional payments (within the contractual limitations) toward the purchase price of the car. The interest you save is due to the remaining balance on the loan being lower. If at all possible, a couple of extra payments up front can offset the overall cost of the loan in the long term and is a good way of reducing your final cost.
I think Elsa is right. My man Spiff will be on shortly and answer this, as he does financing for auto's and is quite an expert.
But from past experience, you must pay the monthly payment, and you can pay more then that, which can be applied to either the principle, or toward your next payment. I did that myself because In the event I forgot to mail it, or ran into a sticky financial problem I was a month ahead on my payments.
Specifying all of your payment goes to principal does nothing. First of all, if all you make is the minimum payment (or less), the interest is still charged and adds to the principal, so you have actually done nothing. The only difference is if you pay more than the minimum payment.
All payments are appllied in the following order:
1) Present Interest due.
2) Interest Past due
3) Principal.
If your payment goes over this amount, then there is a choice to be made, does the payment go to paying down the principal (which is what you as the lendee want) or does it go to prepay future interest (which is advantageous to the lender).
Most credit documents specify where the money is applied. However, it is often okay to designate, either on the check or in an accompanying letter, where it should go.
So, if you pay more than your minimum payment, it is best to pay extra and designate it for principal payment. Doing this will pay down the principal faster, letting you pay off the loan sooner and saving interest charges.
The answer is yes. If the loan is a simple interest fixed rate loan, any payment above the normal payment goes toward principle and time. If you do not make at least the minimum payment each month once you are ahead, then your purpose will be defeated as the extra you have paid will go back to catching up your minimum payment.
I am also a Finance Manager in a 300 unit per month auto dealership.
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