Pay towards your principal?

[mek]

To people who finance with Acura finance, what happens when you pay more towards your principal? Reason why I ask is I drop 5k on the principal and nothing has change. I still have a monthly payment due for next month and my monthly payment and monthly term is still the same.

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[jedi03]

it reduces the time on the loan when you do this. They normally take the interest first and then payments go toward principle. If you put money down before the loan starts then your monthly payment is less, but unless you refinance your loan your payments remain the same

 

[mek]

So my monthly term would go down? So instead of 72 it'll be 62 months?

 

[NoelPR]

You just reduce your interest responsibility, and as others said, shorten the life of the loan.

 

[slowcountry]

It could be worth refinancing if your interest rate is high- local credit unions usually carry the best rates on that. But if you got a promotional interest rate, that's probably the best available right now.

 

[ModJPB]

By dropping $5k on your loan it reduces your loans terms in two ways.
1) the actual principal to pay off is reduced so you'll have it paid off earlier.
2) You don't have to pay interest on $5k worth of principal over the many months, so the term is reduced even more because the term factored in that you supposed to pay more interest.

Unfortunately your monthly payment amounts does not change unless you refinance, but be happy you reduced your loan time by a descent amount.

 

[mek]

Thanks for the response. So if I put more towards the payment..monthly+extra that would lower my payment but the terms still stay same? I dont know why Acura doesnt update the term!

 

[SilverRocket]

By dropping $5k on your loan it reduces your loans terms in two ways.
1) the actual principal to pay off is reduced so you'll have it paid off earlier.
2) You don't have to pay interest on $5k worth of principal over the many months so the term is reduced even more, because the term factored in you were to more more interest.

Unfortunately your monthly payment amounts does not change unless you refinance, but be happy you reduced your loan time by a descent amount.

Ding ding ding, we have a winner.

Also, the benefit of #2 is grossly misunderstood, especially if it's in the first quarter of the loan.

Had I not paid off my loan early, Acura would have taken $16k CAD total interest from me. Instead, they got less than $5k and the car was mine in two and a half years instead of the seven years I strategically signed for.

Only time repaying early is dumb is if you can make more money in safe investments. If your loan is 4% and you can comfortably return 7% *almost guaranteed*, you put the extra payments into the investment not the loan. That's conceptual but IMHO, any loan rate above 5%, especially these days, just pay it off early.

 

[SilverRocket]

Thanks for the response. So if I put more towards the payment..monthly+extra that would lower my payment but the terms still stay same? I dont know why Acura doesnt update the term!

Because their system is not built that way. Quite simply in MyGarage the only thing that updates is how much you have left to pay.

Your monthly payment will always remain per the original amount.

Easy example: You owe $10k to Acura, you pay $500/mth and have 20 months left..... If you pre-pay $9000, they will not reduce your monthly payments to $50/mth for 20 months, you will pay 2 more months of $500 and then be done 18 month early.

The above is an oversimplification not taking into account compound interest but hopefully you get the point now.

 

[ModJPB]

Thanks for the response. So if I put more towards the payment..monthly+extra that would lower my payment but the terms still stay same? I dont know why Acura doesnt update the term!

No, it'll continue to reduce your term and the monthly payment stays the same. The end date won't get resembled on the loan, but I promise once you hit $0 the payments stop and loan ends early.

The upside is, say you end a year early, that is about year+ of interest you won't have to pay. Depending on your apr, term length, and total loan it's possible you'll save yourself around a thousand or two if you continue payments +more.

There's no penalty on finishing a loan early as long as you made at least several months of payments. This method applies to home mortgages too.

 

[Fred 930]

Paying extra each month toward the principal can make a huge difference in the term length (and amount of total interest you pay), especially on big amounts, like home loans. It was years ago but we paid off our home in less than half the time by both refinancing to a lower interest, while keeping our monthly payments the same (or even a bit more when we could).

If you're good with Excel -it's a pretty simple spreadsheet to track the running totals. Plus, it's a real incentive to see the exact effect (each month) of simply paying a bit more on a loan principal whenever you can. The $$ interest amount saved is astonishing.

That said, I completely understand the argument that a sound investment can yield even better results, but very few such investments are "sure things" in these crazy Market conditions. Paying off extra principal IS a "sure thing". And once you are free of those big home (or car) payments, you can put that excess cash into whatever investment you want.

Lastly, for those who say they don't have any such extra cash, use that spreadsheet to see the effect of simply putting your daily Starbucks coffee money into the loan payment (and make your coffee at home).

 

[darsh_v]

Thanks for the response. So if I put more towards the payment..monthly+extra that would lower my payment but the terms still stay same? I dont know why Acura doesnt update the term!

Make sure they are applying extra payments to the principal. Sometimes they will play it to the next payment and you will still be paying interest on it

 

[Victorofhavoc]

If you Google for "ammoritization with extra payments calculator" you'll get a lot of results to help visualize the impact.

Like others said there are two ways extra payments go... Towards principal or towards interest. If you put it towards principal it lowers the total amount you owe on the vehicle, but your monthly payment stays the same. The payment ammoritization schedule is accelerated though, so your next payment is more principal and less interest. This is often the standard/default approach for most loan types.

An often less favorable (but also valuable) option is to have the extra payment go towards interest. In that approach you're paying the interest ahead on your ammoritization schedule and thus taking down the months that you owe. Meaning, if you want to delay payment or you want to temporarily reduce your payment to just principal (or whatever you want to pay) you can do it in this way. This method is used by the uber wealthy to distribute money across assets expected to gain value. It's also used by people stretching themselves to dig a deeper hole.

I don't have acura financing anymore since last year, and I don't recall if they directly offer option 2... Maybe someone else knows.

 

[STi from DSM]

I overpay on all of my loans. I had my loan through Honda Finance and when I made my first double payment for the first month of the loan I essentially made two payments on the car. There is a time of loan left indicator on the Honda Finance App that stated 70 months was left instead of 71 as I had paid for two months. Interestingly enough though it did have me one month out on my payment so the next month it showed that I owed nothing. When I paid off the loan (Long story I still owed $53 on the loan) it had me all the way out until 2030 for the next payment due. (Don't let that fool you though. You still accrue daily interest on the loan)

Buying the amount of cars I do I have found that some finance places will let you essentially pay it forward so much that you don't have a payment for a few months and others will not. My current loan with my M850i lets me pay it off as I want. Also make double payments on this and have the flexibility to not pay one month or so if I choose or if I were to lose my job or have some sort of unforeseen expense. Really just depends on the financing and if that particular institution allows that or not.

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