boss2k

Not sure if this is the right place but here is my question:

When i paid more than my monthly payment the difference between expected monthly payment and the excess payment i made last month is shown as a credit for the next payment , am i not expected to pay atleast the payment as per the sales retail contract every month and any excess payment made should reduce the principal only.

I do the same for my mortgage and excess amount just gets applied towards principal whereas monthly payment remains same irrespective.

Just curious if auto loan works differently than mortgage payments

ucf_bronco

iTrader: (1)

You may have to choose to apply the overage to your principle rather than it going toward next month's payment. I know when I pay my mortgage I check a box to have it applied to principle.

Most auto loans are set up the same and do allow for the excess to go towards principle.

Who is your finance company? Is it through Honda / Acura or a local bank / credit union?

boss2k

Its from a local bank arranged by Acura

However the excess payment i made last month did get applied to principal as its reflected in the loan balance but its still showing as a credit for the next payment.

Pseudomaniac

iTrader: (1)

I used to do the same thing and pay an extra couple hundred or month or so on the principle, but you had to specify, otherwise they want to just take it as "paying ahead on your loan".

Figured out last year It made more sense to pay myself back 4% interest while stocks are down and pulled a 15k loan on my 401k to pay the rest of my 4G TL off. Cars paid for, no leins on the car or loans on the credit, and I'm getting 5x the shares on a re-investment than when they were initially purchased. It's worth a look.

TinyRK

That's what it says on Acura's Financial website:

So unless you don't specify it, it won't count towards the principal.
I have auto-payment set up, so Acura/Honda debits it from my bank-account, so I have to make the extra-payment separately.

swoosh

iTrader: (5)

boss2K....it doesnt matter....

my student loans were 300/month and i used to pay 500/month....every 2 months they would ask me to miss the 3rd months payment but i always kept making that payment....i ended up paying the loans a lot quicker and paying a lot less interest....

either way your principal will be reducing

boss2k

Just got off the call with my bank and thats what they said as you mention, they assured me excess amount is adjusted against principal and their system does not have a way to show them seperately unless i have to call them each month and ask them to reclassify it which is not possible.

I clearly remember that when i used to pay my Infiniti loan , it used to work just like my mortgage excess amount would be adjusted against principal only.

swoosh

iTrader: (5)

^^^ haha i know my shizzz...

sockpuppet

It's a mistake to treat all loans as similar...a car loan is different from a line of credit (LOC), which is different from a student loan, which is different from a mortgage. Even within a certain type of classes, there are differences; that's why we have open and closed mortgages. Also keep in mind that the lender isn't loaning money to you to do you a favour...it's business. That's why they often won't allow a prepayment (such as a closed mortgage)...it cuts into their expected profit.

If the terms of your loan allow for a prepayment (or additional payment) to be applied to the principal, then your next month's payment will be the same, however you will have shaved time off the back end of your loan. On the other hand, if no such prepayment is permitted, then if you do send them too much money, they may elect to simply apply it to the next month's payment (which mean's there's really no benefit in doing so, as you're not shortening your term...the money is better off in your account until the next payment is due).

The key is to read the terms of your loan, and determine how early payments are treated.

swoosh

iTrader: (5)

u kidding me right ??? if you really believe in this, you shud talk to your BANK for clarification....your not making any interest on the $$$ sitting in your account, whereas if you make an extra payment, it will save you on the interest the bank is charging....anyway consider these cases:

CASE1: Loan amount $10,000 Payment Amount: $500/month....Payment Period: 20 months....
If you pay $1000 instead of $500, and the bank applies to your next payment, you WILL finish paying the loan off in 10 months....so you have cut down the loan period and the interest you pay....

CASE2: Loan amount $10,000 Payment Amount: $500/month....Payment Period: 20 months....
If you pay $1000/month even if the bank applies the remaining $$$ towards the principal, you will end up finish the payment in 10 months and the interest will be the same....

Either way I like CASE1....why you ask....

when i was paying for my car, I used to make an extra payment and the bank used to put it towards my next payment....doing that i didnt have to make a payment for 5 months....when i was outta job (damn recession) i didnt make a payment for 3 months without any penalty....had it been case 2, I wouldnt have had been able to skip a payment, leave along 3....

sockpuppet

It's not what I believe...it's what I know. And as a lawyer working in commercial lending, I do know a little bit. You may consider going back and reading the portion of my last post that you so kindly highlighted.

If the lender allows prepayment, then those prepayments will be applied against principal outstanding, and will indeed cut down on your ultimate cost of borrowing. If the lender does not allow prepayments, then it is not obligated to apply anything against principal unless and until the payment is due. It's not unreasonable to assume that if you pay $900 on your $750 payment, the lender may hold on to the extra buck fifty and apply it when the next payment is due. That means applying it to the blended principal and interest payment, without chipping away at the principal more than allowed by the original amortization. But you can't assume that the lender will apply it right away, and keep collecting up these overpayments, allowing you to turn a closed loan into an open one.

Something else you're forgetting (or maybe simply don't know) is that in many loan situations, the lender is actually just a "servicer", and has collected investment money from a number of individual lenders, and has promised them a return for the use of that money. They then offer a closed loan, and use the regular payment stream to pay off their investors. Opening up that loan would be problematic, as they've already committed to a certain return in favour of their investors. This doesn't really happen in the car loan area, but is a good example of why loans are closed.

Typical closed residential mortgages allow some leeway, by having something like a "20/20" deal (where you can increase your payment amount by up to 20% once per year, and can prepay up to 20% of the original principal balance once per year). Sometimes it's 10/10 or 15/15.

My car loan is open. If I want to double down, or if I win the lottery and want to prepay the whole amount, that's fine. But that's through a bank...they don't make a lot on car loans, and so are happy to have them be paid down. I suspect a dedicated automotive finance company would be a slightly different story, but I don't deal with those lenders, so I can't comment there. The point is, your deal with your lender is what you're stuck with. And if it does not allow prepayment, then if you think by increasing the payment amount you can do an end run, you're in for a surprise.

Turning to your examples...you haven't allowed for interest. In your "Case 1", if the loan amount is $10,000, and you're done in 20 payments of $500, then somehow you've talked your lender into a 20 month interest free loan, in which case forget anything I've written above; you're clearly smarter than me.

Finally (and as proof that I am a lawyer, just look at how long this post has become) you make some sense about making the extra payment in case of a "dry spell" where you can't make a payment. The counter to that is, of course, that of you had taken the extra payment and put it in the bank, yes, you'd only make about a cent and a half of interest, but you'd have cash available to keep making those payments. Or buy food. Whatever's important to you. That's assuming you had the discipline to not touch that money. I wouldn't have that kind of restraint.

sockpuppet

swoosh:

Upon reflection, my reply comes across as much more confrontational than was intended. I hope no offense was taken.

swoosh

iTrader: (5)

^^^ no offense buddy.....all here to learn....

couple things i would like to bring forth:

1> i havent experienced (personally) where the lender is a service provider since I have been with credit unions + Citibank + chase who provide the $$$ themselves....so i do not know that scenario....

2> I do agree with what you say but partially....remember interest is calculated DAILY....so imagine you have to make $500 payment where $400 is principal and $100 is interest....

So say your payment is due on 1st of the month and on 1st Jan (for the sake of simplicity) you make a $500 payment....and then on 2nd you make another $500 payment....now your next payment date is March 1st....since your 2nd payment was within a day, most of it goes towards principal....and only very very little goes towards interest....

but wait you havent escaped them yet....if you dont make a payment until march 1st your will be paying interest for 2nd Jan to 1st March.....

but if you make another payment on 1st-2nd Feb, you will be back to 400-100 split (again depends on loan amount).....

sockpuppet

Whoa...now you're getting complicated. Okay...first, you're talking about interest being calculated daily, but I don't think you mean that; you probably mean to say "compounded" daily. A lot of people treat the concepts as interchangeable, but they're not. "Calculated daily" would mean that your payment would change month to month, given that each month has a different number of days.

But more importantly, you're making the assumption that an early payment is applied to principal just because the interest hasn't accrued yet...but that's not the case in a closed loan. In a closed loan (with no prepayment privilege), the lender is under no obligation to even accept an early payment. Send them that cheque on January 2, and they can simply hold it until February 1.

Strictly speaking, on a closed loan, if you win the lottery and pay the full amount of your principal balance back, the lender can still insist upon the present value of the interest that would be payable.

Again, you can try and make a payment out of turn, and hope for the best...and if your loan allows for it, then maybe you cut yourself a break (like mine). But otherwise, it's like paying too much down on your credit card...don't look to Visa to pay you interest. Your deal with the bank is your deal with the bank.

swoosh

iTrader: (5)

^^^ in all honesty i think your confused bro....

you mean to say if you make a payment on jan 2nd and you call the bank on jan 15th your loan amount wouldnt have changed ??? i doubt that is true or even legal....

also EVERY loan (car/auto/cc/personal/mortgage) has a PAYOFF amount....whether closed or open or "immagetu"....the payoff amount is valid until a certain date (sometimes it changes daily and other times it changes monthly).....if you win a lottery and PAY that payoff amount, your DONE with the loan....

sockpuppet

swoosh, I could agree with you, but then we'd both be wrong. The simple fact is, each loan is different, and is dictated by the terms you negotiate. If they were all pre-payable, there'd be no such thing as a closed loan. Generally, you pay a bit more for the privilege of being able to pre-pay, but again, it depends on your lender.

The point, and this is my final comment on the matter, is that your deal with the bank is the deal you're stuck with. Wishing it to be something different doesn't change things. Thinking something is "fair" or "unfair" doesn't change things.

I really wouldn't expect anyone to change the way they do things based on the comments I've made in this thread. But I really hope that nobody takes your advice and blindly prepays a loan, and then stops when they think they've "paid enough". Read the loan papers. That is all.

jjsC5

Wow, there is some weird information here. Let's say your payment is $500 a month for two years. If you pay an extra $100 a month for the first 12 months, are you saying that you still have to pay $500 a month on some loans for the full 24 months even though you have paid $1200 extra the first year?

I don't believe that can ever happen. It's tantamount to saying that you are not allowed to pay off a loan early and as such you can't sell you vehicle until your have paid off for the original term of the loan.

TinyRK

That's how it is!
I ran just into this: I bought an engagement ring. 18month 0% financing.
I thought, well, I take the cash, put it in a HighInterest CD, get the interest and pay off the ring let's say in Month 17, or I just take the monthly payments pre-calculated, but it in savings account, eearn interest and pay it off.

But nope, since it was a store charge card (the charge makes all the difference!) I have to pay the minimum amount due each month.

But: I can pay off the "loan" as soon as I want. But there are loans, where you signed a contract with the bank, that you can't pay off the loan early, because they want to make their money off this.

Man, way too early for me and I only had a sip of coffee yet!

TLtrigirl

iTrader: (1)

interesting....my car loan on my TL was written for 66 mos, i paid it off in 54 months. however on my credit report it shows the loan was for the original 66 month period even though i was not making payments on thel loan th remaining 10 mos (b/c i paid it off and i had the title in hand soon after my last payment).

my student loans...my next payment isn't due until 2015 or something like that, but i keep making payments with the extras being applied to the principal.

my current car loan...my extras have gone to the next months payment due. soon it'll be like my student loans, i'll be ahead. both have payoff amounts as well which are good until whatever date they give. can't wait until all these loans go bye bye. only a few more years.

Acura_Dude

Thats how all my loans are. I know w/ credit unions (mine) they're mostly open for the matter and I usually inquire about prepayment penalties. I agree with Swooshie and Sockpuppet, both are right but both live in to different countries (Canada and USA). I don't think there's much variation in lending b/w the countries (though I may be wrong big time), but I've never heard of 10/10,15/15, and 20/20 loans like Sockpuppet mentioned earlier. Kinds of reminds me of an ARM like 5/1. Interest only for the 1st 5 yrs and then every year after the arm resets. That's how a lot of people in this country got in trouble with their homes. When it's time for me to get a mortgage I'll go with a 20 or 30yr (more than likely the latter) fixed mortgage from my local CU and make sure there isn't no prepayment penalties.

When I had my last car loan, I had prepayed ahead so much I was like 8 mos ahead and then one day I checked online and it had pushed my due date back up to the followin month, BUT that was my problem because I quit making payments (thought I was in the clear). If I would've done what Swoosh did then I'd be in the clear for payments for awhile. Stopping on the payments (naive newbie with a car loan) doesn't do anything to help pay it off faster, but it did knock out a chunk out of the principal.

TLTRIGIRL!

n-spring

Bottom line, don't sign anything until you read what you're signing. At least ask about pre-payment penalties, early payoff, etc, and ask them to point out the language in the loan contract. Caveat emptor.

TLtrigirl

iTrader: (1)

swoosh

iTrader: (5)

Now this might seem a little confrontational....maybe there is a difference in the US and the Canada loan terms....but if there is not and your really a financial lawyer, i feel bad for your clients....

NO you dont stop when you think its enough....you stop when the banks think its enough....and dude its 2012 not 1846, use the computer, all banks SHOW everything online....and you can see where your payment is going....

I hope you are not giving out advice to your clients to keep paying the $$$ and the bank is making interest on your.....

imagine a very very very very veryyyy simple scenario (if you cant get this, GOD bless you)....

Daily interest is $1 (imagine all months have 30 days)
Loan amount is $10,000
Monthly Payments are $530 out of which $500 is principal and $30 is interest...
Payoff Term is 20 months....
Total interest they will make is 20 months x $30/month = $600
Total you will payoff is $10600....we clear so far ???

Now you decide to add $500 every month.....
Monthly payment = $1030, 1000 for principal and 30 for interest....
After 10 months you would have paid the loan offfffff and the only interest you paid is $30 x 10 months = $300....

After 10 months the bank WILL NOT come asking you for more money....unless you are late by a day or so when the PAYOFF AMOUNT would have expired....

YOU BET....it WILL NOT happen....MR Lawyer here is making his own rules....

If you make an extra 1200 payment over the 1st year, you will pay the loan off atleast 2 months early (going by your stated case).....I have done this for over 4 loans....and 4 different kind of loans....


that was a good thought on your part....what you missed was "MINIMUM MONTHLY PAYMENT"....0% interest for 18 months does not mean NO PAYMENT for 18 months.....

same with your credit card....the have 0% APR for 15 billing cycles and they clearly state "IF YOU FAIL TO MAKE MIN MONTHLY PAYMENTS, YOUR APR WILL GO UP PLUS WILL BE CHARGED PENALTY".....

a friend of mine was paying cash for 2010 Honda Odyssey....he got approved for 0% APR by Honda....i told him "dude dont pay upfront....take the loan....its a 0% APR for 60 months, take the $45K and put it in a bank (i think they were offering 1.5% bank then on savings account)....told him to put the 45K in the saving account, and set up auto payments to your car loan"....so you will make interest on savings account and at the same your car will be getting paid off"....

say the ring was $15K....if you would have taken the $15K and put it in a savings account and setup for recurring monthly payments of $1000 for 15 months.....you would have paid the ring off within the 0% APR time and make interest on 15K for 1 year........

THIS !!! but according to sockpuppet your bank is eating your $$$

yes....i agree with you....i was telling my wife "hey even thow we know we can pay the house loan off in 15 years, lets take a 30 year loan....imagine 15 year monthly payment of $5000 and 30 year monthly payment of $3000, i dont mind paying $5000 a month on a 30 year loan....and incase difficult times hit us, we can go back to $3000/month which is not possible to do on a 15 year loan.....

yes, do ask your bank....spend time with the loan officer....i am new to the country (came to the US in 2005) and I have spend atleast 5-7 hours on the phone with the loan officers and credit report agencies to see how to get my score up and how to get a deal on the loan and how to avoid too much interest.....it really helps with your loans and your general know-how....

ardenne90

Swoosh...Being a software developer in the financial services industry for 15 years, I am forced to agree with Sockpuppet. The treatment of extra payments is pretty much governed by the terms of the loan. Loan terms can vary quite a lot, especially when there are multiple stakeholders involved on the lender's side. So you will be best advised to read the terms of your loan and look for a prepayment clause, or just give your lender a call. Unlike Sockpuppet, I will keep my post succinct-

swoosh

iTrader: (5)

^^^ now if only sockpuppet would have posted like you did....

the only thing i say is: if you make an early payment (prepayment) your loan amount will go down....but yeah its ALWAYS A GOOD idea to talk to the lender....ask em what will happen if you make an early payment.....

as much as i know the lender cannot hold your payment....as TLTRIGIRL said, her payment is not due until 2015, which means until 2015 she has paid FUTURE principal + FUTURE interest until 2015....if she calls the bank and tells them to make it current....they will take all those FUTURE principal + FUTURE interest payments and apply it to her loan amount (principal)....and her next payment due will be in March....

sockpuppet

Okay swoosh...you managed to sucker me back in, because you became confrontational.

First, the example you gave above doesn't exist in the real world. Clearly you don't understand the concept of amortization. And if you don't get that, I've got no hope of explaining the rest of it to you.

Second, you suggest that I was not sufficiently succinct...and you're probably right. But did you even see your last post?

Finally, I'm not giving any advice here (since it's what I normally get paid for) aside from this simple piece of advice: Don't listen to advice from anyone unfamiliar with the terms of your loan. As I've said a few times, my car loan is much like the one you are imagining (not the one you describe, mind you...again, that one doesn't exist)...I can pay it off anytime I like. No penalty. And I suspect most car loans are like this. But...some are bound to have "lease-like" terms...you want out early, you pay for the privilege. My hope is that nobody here takes advice on such matters from some stranger on the internet.

sockpuppet

I'm unfamiliar with mortgage loans in Florida...aside from knowing that you have a lot of mortgage products that exist down there that don't here.

That said, generally, you pay for an open mortgage (no penalties)...usually in the form of a slightly higher interest rate. If that is the case, you may want to explore the options available to you before swearing off closed mortgages. Mine is closed, since I know I won't likely win the lottery and want to pay off the mortgage really early...and if I did, I really wouldn't be concerned with the penalty. Also, again, I can increase my payment by a certain amount, and can pay an extra lump sum once per year. Having those options available, it made no sense to get an open mortgage at a slightly higher rate.

Another thing to explore with your lender is payment frequency. If your lender allows you to make weekly or biweekly payments, that can help chip away at the principal faster (and swoosh, before you jump on this as being contradictory, reread the first 5 words of this sentence).

That differs from my car loan, as you want that to be open, since there's a better chance that you'll sell the vehicle before the loan is paid off. That's likely why most car loans from banks are, by default, open.

swoosh

iTrader: (5)

well yeah the example doesnt exit but you didnt get the point behind it....why doesnt it exist, coz interest is compounded daily and with EVERY monthly payment your interest to be paid keeps getting low....but i wanted to make it very very simple....

i think we all deviated from the main topic....OP talk to your bank....

and about giving free advice, i dont get paid to help fellow members with their car or any other advice but even thow i do....i think i need to talk to Astro LOL

Acura_Dude

Yeah loan-servicing in the USA is pretty much standard for all states across the board. I'm sure everyone knows of ARMS and fixed-rates, etc etc. I have heard of some off the wall loans before. Oh and stay away from title loans, i've seen too many people get screwed over on those. They can go up to 300%. When the time comes i'll definitely check into more options and etc. It'll definitely help me in life. My mom is great about finances and researching, but my dad, forget it. He leaps before he looks. My sister is like that also. I'm not. I also got many friends as impulse shoppers.

TLtrigirl

iTrader: (1)

swoosh i'm not really that concerned with my loan repayment plans...i have no penalties for paying it off early...and my interest rates are nice and low. this has been an interesting discussion though.

i just want my loans to be paid off. soon enough i'll get there.

swoosh

iTrader: (5)

^^^

you will get there ..... my student loans were pretty low as well 2.5%....went down there from 5%....guess my credit was getting better....i opened up an HSBC online saving account which was giving me 3% interest on my $$$, so i used to put my money there and only make the minimum payment on my loan....

in 2010 the HSBC dropped their interest rate to 0.84% and i was like took the money out and paid my loan off

cant wait for you to get there....its a SEXY feeling i tell ya girl.....

jjsC5

First part I never said. I get that you have to still pay the required amount every month until it is paid off. No way in hell do I believe they can force you to not pay a loan off early. Maybe someone told you that, but it doesn't mean it's true. There are laws that govern such things.

BTW, I do get that there can be a "penalty" for early payoff. But penalty does not mean you pay more than you would have. It simply means that you may not be excused from paying some or all of the interest that you would have paid over the life of the loan.

TinyRK

That's what I interpreted out of this:
Well, it was early in the morning,so ...
And I meant exactly what you wrote: you can pay it off early, but there well be a penalty. I just had issues expressing myself.

Shoot2Thrill

Generally speaking I'm not sure paying any loan the is let's say 3% interest rate is a good financial move. You can reasonably make more in the stock market with a diversified portfolio. Most people will agree the stock market can at least give you 6% or better. Also not to get off topic but a easy financial move that most people just don't utilize is you would want to be sure you are getting all matching 401K money because that is typically a 50% return right off the bat.

swoosh

iTrader: (5)

^^^ well we are diverting from the main topic, but here is the deal:

1> Stock Market does not guarantee returns....leave alone 6%, if you pick up the wrong stocks you will be going wayyy negative.....
2> 401K follows the same plan....the only reason i have it to get some tax benefits....my company matches 25% of my input....i have been pump 8K (limit) every year since exactly 2 years and my balance is ~17K.....if you see the 25% match, it would have been ~20-21K....but since thats an investment as well, returns are not guaranteed.....

I think if your interest rate on your loan is less than 1-2%....you can get CD's and savings account which guarantee returns.....

if you interest rate on your loan is 3%+, your better off paying whatever extra every months to pay it off quicker....

jjsC5

Been there, done that.