Paying the principle amount?

Question

(This is a continuation to my last question)

Now I have a very high interest rate on my loan, over 20% for 48 months. I was told that I could make payments towards the principle amount along with the amount that I am suppose to pay and that will lower my loan amount, which would cut the interest pay off the loan amount, is that true? And if so, what happens to the interest? Would I have to pay for it or does that go out the door once I finish off paying the amount? I plan to pay off the loan amount before the 48 months, and also is that a good idea? I was told I should just pay the whole amount without paying towards the principle but someone else to me to pay the original amount and makes payments towards the principle also. He told me to send in what I could even if it's $100 every 2 weeks, is that a good idea? Please help me!

Answer 1

Every schedualed payment you make pays an amount towards the principle and it pays interest too. Say you have a 10,000 loan.
You payment the first month is $400. About $167 of that payment is interest. leaving $233 to go towards the principle. This leaves 9,767 left on the principal of your loan. This is what you get charged interest on next month. If you pay extra towards the principle then you'll pay less interest next month. If you pay an $100 you'll end up paying $2 in interest next month. This can accumulate ocer time saving you big money.
So yes, paying extra towards the principle, especially with your high interest rate, is a good thing. It's also a good thing to pay off your loan early. That's less money you'll be wsting on interest charges.

Answer 2

It always good add more payments towards principle. With credit card debt, the interest normally calculated based on how much loan you have left, hence, the sooner you reduce the principle, the lesser you have to pay for the interest. Some other type of loan, might have a fixed interest, but still better to have the loan pay off early to reduce interest payment.

Paying every 2 weeks is the same as adding an extra month in a year (13 months instead of 12 months). Thus, if you could not pay every 2 weeks, you can add another monthly payment after December - for the 13th month. It'll work the same way.

Answer 3

The interest you pay is on the time you use the $$. So if you pay extra every month then the amount of interest you ultimately pay is less there for it reduces your effective rate. Yes this is true. but as has already been stated it does not reduce your monthly payment amount. It is just simply stated the time value of money. Interest = principal X rate X time. On a 20% interest rate you may look into refinancing the loan if you can not make extra payments to the principal and this would also depend on the amount owed. If it is a small amount of $$ it is probably not worth the time and effort to do so. If you make extra payments to the principal many companies would prefer that you write a separate check and mark in the memo section principal only.

Answer 4

First of all.....MAKE SURE that you are able to pay down the principal off quicker...you want to make sure this is an OPEN loan. Even though you can make payments above your regular payment it DOES NOT MEAN that you are actually paying down principal. In other words some loans allow you to pay extra dollars above and beyond your monthly payment but if the loan is a closed loan all that means is you are making payments towards the TOTAL amount owed (interest and Principal), which would mean you are not going to save a penny! In a LEASE it is called Lessee's liability and in a purchase contract it is known as the purchasers liability. IF in fact you ARE paying down principal than YES it will save you a TON of money. Every 1$ you put toward just principal is saving you 20% per annum on that dollar (plus the compounded amount).

At my dealership we only use Banks and finance companies that are totally open loans. It is one of my requirements.

I hope this helps

Answer 5

Making extra payments to the principal is generally a good idea. Basically it saves you in interest because you are paying the loan off sooner.

Lets say for example you have a loan for $10,000 at 20% for 4 years. The payment would be $304.30 per month. Your interest paid after 4 years is $4606.57.

If you were to pay $410 per month ( an extra $ 105.70 ), you will have the loan paid off in 2.667 years, and pay $2941.92 in interest. You would save $1664.65 in interest over the term of the loan.

Answer 6

You need to make your regular payment for the month first and then you can put some on the principle. I did that on my first and 2nd mortgages and got a 15 year loan paid off in 12 years.

It also depends on your tax situation if you want to pay it off faster or not. If the interest is tax deductable, you may want to keep the original schedule. If it isn't, I'd pay it off as fast as possible and get out from under the debt.

And make sure the bank (or whatever) knows that the extra money is for the principle. They usually like to put it on the interest - more money for them.

Remember, even if you make extra payments, you'll still need to make your regular payment each month. You will not be able to skip a payment because you've paid ahead.

Answer 7

Pay off the loan as quickly as possible. What you pay toward interest is gone. What you pay toward peincipal reduces the amount of both principal and interest you owe. Pay as soon as you get the money. That will reduce the amount of interest they charge starting the day they post the payment. You don't have to wait for them to send a bill.

Answer 8

Find out if your loan was created on a Simple Interest contract. If your loan was created on a Precomputed Interest contract (like many buy-here-pay-here dealers use, depending on what state you live in) then paying extra will only be paying early but not reducing the amount of interest charged on the loan. Only a payoff (like, if you go somewhere 3rd party and refinance the loan in simple-interest fashion) will reduce the interest liability to the first lienholder.

Answer 9

on most loans it would just take off the back end, and lower the amount of payments not lower the amount of payment, I e if you are payinf 300 bucks a month for 48 months and you throw an extra 1000 in it would take of your last 5 payments, because of no intrest on them yet, but your monthly payment would still be 300

Hope this helps :)

Answer 10

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yes here is one example on 150 k 30 yr fixed with a 6.5% rate first i must say you should make an additional payment and mark on check "apply to principle"! this way you have proof and there is no question your intention! ok 150k home making a 150 extra payment every month! pays your home off in 21 years and a 9 months