My Car Loan

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On April 22 2011 08:00 Cauld wrote:
I don't think interest is calculated in any crazy way. Take the principle and multiply by 1 + the percentage rate divided by the number of payments/year. That's your new principle.

So for your first payment:
0.0499/12 ~ 0.00416 + 1 = 1.00416
1.00416*20,000 = 20083.17

So your interest is compounded monthly and your payment is setup to pay off the loan in the desired time frame. There's no front loading the interest, the interest is based on the principle which naturally decreases over time.

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On April 22 2011 08:05 eNtitY~ wrote:
Weird, I also got a $20,000 Car loan in 2008. I think I'm paying much more than $2653 in interest though :/

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On April 22 2011 08:02 micronesia wrote:

I believe when my loan started my payoff amount was significantly higher than my 20k balance plus my first payment, thus, front loaded interest.

edit: can't you also see it clearly in the first graph? That information was given to me directly.

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On April 22 2011 08:08 micronesia wrote:

Do you know your interest rate? I cosigned with my dad and agreed for automatic payments from my checking account so I got a pretty good rate for the time (summer 2k8).

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On April 22 2011 08:08 micronesia wrote:

Do you know your interest rate? I cosigned with my dad and agreed for automatic payments from my checking account so I got a pretty good rate for the time (summer 2k8).

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On April 22 2011 08:11 Cauld wrote:


No. The interest is based on the principle. So as you make payments and the principle decreases, so does the interest amount. Since your payment is staying the same and is greater than the monthly interest the additional payment is applied to the principle. The next month the principle is smaller, so the interest amount also smaller, etc.

Your payment amount is setup so that the remaining principle after the desired number of payments is 0. But, its possible to have a loan where you only pay interest, and principle increases each month (your payment would have to be less than the monthly interest). After a given amount of time your payment increases and then you begin to pay down the principle.

Just do a couple of the monthly calculations and you'll see how it goes.

They can tell you that over the course of the loan how much you will end up paying. But there's nothing stopping you from paying off the balance at any point and not paying any remaining interest (except for a clause in your contract that may forbid, or have a penalty, for early repayment).

What you're looking at is even more pronounced in the case of a 30-year mortgage. That's just how paying off a loan works.

I guess if you wanted to call it front loaded interest you could, but I don't think that's an accurate description of the situation. In my mind front loaded interest would be something where your rate is %10 for the first 2 years and then drops to 2%.

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On April 22 2011 08:25 tofucake wrote:
Principal never ever ever increases by anything other than a bounced check. EVER

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On April 22 2011 08:11 Cauld wrote:


No. The interest is based on the principle. So as you make payments and the principle decreases, so does the interest amount. Since your payment is staying the same and is greater than the monthly interest the additional payment is applied to the principle. The next month the principle is smaller, so the interest amount also smaller, etc.

Your payment amount is setup so that the remaining principle after the desired number of payments is 0. But, its possible to have a loan where you only pay interest, and principle increases each month (your payment would have to be less than the monthly interest). After a given amount of time your payment increases and then you begin to pay down the principle.

Just do a couple of the monthly calculations and you'll see how it goes.

They can tell you that over the course of the loan how much you will end up paying. But there's nothing stopping you from paying off the balance at any point and not paying any remaining interest (except for a clause in your contract that may forbid, or have a penalty, for early repayment).

What you're looking at is even more pronounced in the case of a 30-year mortgage. That's just how paying off a loan works.

I guess if you wanted to call it front loaded interest you could, but I don't think that's an accurate description of the situation. In my mind front loaded interest would be something where your rate is %10 for the first 2 years and then drops to 2%.

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On April 22 2011 08:24 tofucake wrote:
Your last payment is off because that's how it works out. Your last payment due will only be for the remaining principal, as you'll have paid off the interest on the 59th payment.

As for the payment, you're close. It's actually

Where r is the periodic interest rate. For calculating payments, it'll be daily. The reason your interest decreases over time is because at the start of the loan, you have a higher principal balance (P above).

The actual payment (assuming Simple Interest here) is:
Fees = Total amount paid minus any fee balance (late fees, typically)
Interest = Current principal balance times the periodic interest rate (APR / 365) times the number of days since last payment plus any outstanding interest due
Principal is the rest

On an Actuarial loan, that 365 could be 360, 363, or 365.
On a Rule of 78s loan you're getting totally shafted in every way possible (Ro78s is illegal in 17 states because of it's terribadness)

What this means is that, as long as you don't have a Rule of 78s loan, paying early and overpaying will reduce overall how much you pay. This may seem counter intuitive (wtf pay more = pay less?) but the financing company (or bank) gets all of its profit off of the interest. By overpaying you prematurely reduce the principal balance, so if you paid $400 every month instead of $377.56 you'd end up paying off the loan a couple months early, which reduces the number of days calculated for how much interest is due (so you don't pay that interest at all).

By paying early, you're cutting short the number of days interest is calculated on as well. For example, if you payed May 1st, you'd put $40.84, but if you pay a day earlier $39.48. So that's another $1.36 that goes directly to principal, which will reduce how much you pay next month.

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On April 22 2011 08:26 Michaelj wrote:
They're not "front-loading" the interest. They do calculate your payments such that you can 60 equal payments. But if your loan agreement allows you to prepay your loan, you would find that you could just pay for the remaining principal, and not pay any of the extra interest.

Example:

$20,000 loan
1% interest
$300 monthly payment

Period 1: $20,000 remaining principal, $200 interest payment, $100 principal payment
Period 2: $19,900 remaining principal, $199 interest payment, $101 principal payment
Period 3: $19,799 remaining principal, $198 interest payment, $102 principal payment

So you see it's pretty clear that you are just paying the interest on the principal that you currently have outstanding. The car companies have just adjusted your monthly payment amount such that you pay an even amount every month, and everything takes care of itself neatly by the time you 5 years are up.

TLDR: The suggested payment amount presumes you take the full 5 years to pay. If you have $15k in principal left, and want to pay if off in full today, you can and not pay a dime of extra interest

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On April 22 2011 08:28 Michaelj wrote:


You'd be surprised... in the housing boom people would get negative amortization loans that meant they would pay LESS than interest. They'd try to flip the house as soon as they could.

http://en.wikipedia.org/wiki/Negative_amortization

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On April 22 2011 08:14 eNtitY~ wrote:


Yeah just checked, it's 9.4 and I've already paid $4000 in interest .

I'll end up paying ~$10k in interest before it's done. I also co-signed with my dad (Very high 700s CS) but didn't do automatic payments and also had a 72 month contract.

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On April 22 2011 09:01 a176 wrote:


why in the world would you agree to an-almost 10% interest rate, completely ridiculous

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