im paying for my first car and i have noticed that my interest is higher than my principal what exactly is interest for what do they do with that money is this normal ?
2007-10-06 10:42:57 · 6 answers · asked by mimi 1 in Business & Finance ➔ Personal Finance
This is money that you are paying the bank in order to borrow their money for the car. This is money that is being wasted since it is paid on something (car) that goes down in value.
It is discouraging that people are allowed to borrow money without being educated on what they are doing. It sounds like you have a horrible loan. Do you have a bad credit history? If your interest rate is more than 8 to 9 percent you probably have a horrible loan that you need to get out of. STOP PAYING INTEREST ON THINGS THAT GO DOWN IN VALUE! Either pay this car off as fast as you possibly can, or sell it and pay cash for something cheaper. Car debt has become a way of life in America. CAR PAYMENTS ROB PEOPLE OF SOME SERIOUS WEALTH!
Let me give you a scenario. The average car payment in America today is about $450 a month. Let's say that instead, we paid ourself this car payment. In about 11 months, we could pay cash for a $5,000 car and keep paying ourself this car payment invested in a good mutual fund that averages around 12% a year (the market average over the last 80 or so years). Lets say that every other year, we upgrade in car by about $5,000 never buying new so we are not taking the butt kicking that new car depreciation offers. If we keep paying ourself $450 a month from age 20 to 70 while taking out $5,000 every other year to upgrade our car, we will have $7,513,965 left over at age 70. Don't believe me, do the math. At that point, go ahead and buy yourself the nicest new car you can find. You can officially afford it.
You can buy used yet reliable cars. And when you use cash, you can find some deals! I recently purchased a 5 year old VW Passat with 75K miles on it for $6,000. It books for about $9,500 but the owner was moving soon and I flashed cash at him. It should last me for years.
I don't know the specifics of your situation but hopefully this can help others who read it. Stop financing cars and buying new cars. AND DEFINITELY STOP FINANCING NEW CARS! That is double stupid. I hope I don't sound harsh but people need to understand this. Get intense and pay down this car or sell it today!
Hope this helps!
2007-10-06 11:43:45 · answer #1 · answered by Anonymous · 0⤊ 0⤋
I guess u are wondering how come your interest is higher than your principal.
First thing first, if you notice, your monthly payments are fixed. If that is the case, you would know that for your first monthly payment, a large part of your first monthly payment would consist of paying for interest since that is the time when your principal has not started to pay down. So maybe around 95% is interest payment and 5% is used to pay down the principal.
As you keep on paying out your loan through monthly installments, you pay off your principal faster and you pay less interest.
Such a mechanism is hidden from many non financial literate consumers. So take note of this the next time u choose a loan.
2007-10-06 12:16:51 · answer #2 · answered by Strategist 2 · 0⤊ 0⤋
That's the cost you pay for using someone else's money in order to buy your car. On a car loan, if your interest is higher than the principal amount you have an extremely high rate or an unusually long term on the note, or possibly both.
What do they do with the money? They keep it. It's the lender's money now. Remember, you're paying them for the use of their money.
Yes, it is standard practice. For example, on a $20,000 car loan for 5 years at 7.5% APR, you'd pay a total of $4,045.54 in interest over the life of the loan if all payments were made on time.
2007-10-06 10:57:28 · answer #3 · answered by Bostonian In MO 7 · 0⤊ 0⤋
The financial institution that lent you the money to buy your car from the dealer. Its basically a loan that you got and you are paying the interest on it. The interest is the money that the they are charging you to lend you the money (the principal amount).
2007-10-06 11:13:00 · answer #4 · answered by Michael K 4 · 0⤊ 0⤋
Interest is money the lender gets to keep for taking on the risk of lending you money. For example, say your friend wants to borrow $300 from you for a month. You tell her okay, but when she pays you back, she has to pay you $310 since you helped her pay for something she couldn't afford at the time. It's the same concept.
2007-10-06 11:36:42 · answer #5 · answered by Vadalia 4 · 0⤊ 0⤋
Interest is the "charge" for using the money. I cannot believe you signed a retail installment contract and have no concept of this. What do they teach in school? Do they tell you anything about how to research something? Find out something on your own?
2007-10-06 10:47:37 · answer #6 · answered by Anonymous · 1⤊ 0⤋