Car payment's interest and principal (credit, loans, debt, payments)

[eliptik]

Below is a year's worth of car payments that I am financing so far, but what I don't understand is why does the principal amount and interest change every time even when I pay the same amount? I paid $400 the last 5 months and the principal amount and interest keeps changing. Can someone please explain? Thanks!



Financing $18000 for 5 years. APR is around 8%.

[Mathguy]

The number of days between your payments (9/24/2007 & 10/22/2007) aren't the same and interest is calculated daily. Your 2nd and 3rd payments were roughly 32 and then 28 days. You are paying a little over $4 a day in interest and the difference in the interest was about $18 = ($131 - $113).

In general the interest portion should be going down with each payment given a uniform payment plan.

Your payments aren't level but that won't have a huge impact here. I can give you an example if you want but the main reason is the days between payments.

[sonarrat]

That is the funkest amortization schedule I've ever seen. Very strange.

[eliptik]

Originally Posted by Mathguy

The number of days between your payments (9/24/2007 & 10/22/2007) aren't the same and interest is calculated daily. Your 2nd and 3rd payments were roughly 32 and then 28 days. You are paying a little over $4 a day in interest and the difference in the interest was about $18 = ($131 - $113).

In general the interest portion should be going down with each payment given a uniform payment plan.

Your payments aren't level but that won't have a huge impact here. I can give you an example if you want but the main reason is the days between payments.

Ok thanks for the reply and I am kind of understanding it now. Can you care to explain the example? And if I want to keep the interest low and at a constant rate, should I pay a little earlier before the due date and always at the same time each month?

[mommytotwo]

My house mortgage is just like that, each month a differnt portion applied to interest/principal. They explained it was due to the time period between payments, just like mathguy said.

[Mathguy]

Originally Posted by eliptik

Ok thanks for the reply and I am kind of understanding it now. Can you care to explain the example? And if I want to keep the interest low and at a constant rate, should I pay a little earlier before the due date and always at the same time each month?

Ok, lets say you owe 15,000 right now.
8% annual interest rate will work out to roughly .6% a month so you are going to pay approximately $90 a month in interest.

Lets say that you find $100 on the street and decide to immediately pay down your debt to 14,900. you will pay about 60 cents less interest THAT MONTH but over the life of the loan you will have saved maybe $30.

Barring some major pay down you are not going to see the monthly interest drop * a lot* but you will be saving that amount again and again over the life of the loan.
1
Here is the example again on the value of the 100 extra payment:
(These are rough because Im riding an exercise bike right now and am just trying to convey the general concept)
One month savings = $100 x .006 = $.60
Savings if 4 years left on loan = 100 x (.08 x 4) = $32

Its a little more complicated than this with compounding etc. but basically you save that 60 cents not just for the current month but for the future months too.

Again, your monthly interest will pretty much be your balance x the monthly interest rate.

Best of luck.

[cardinal2007]

The earlier you make the payment the less you pay on interest over time, I would pay it as soon as I get the money, i.e if I get paid on the 15th of every month and can afford paying the $400 then, and the 1st you get paid again, then consider this:

Pay $400 on Sept 15.
Pay $35 on Oct 1.
Pay $365 on Oct 15. (Assuming that is your monthly payment).
Pay $35 on Nov 1.
Pay $365 on Nov 15.
...

Paying the $35 early only saves you $1.4/yr so it might not be worth it.
Moving the $365 up 10 days will save you about $10/yr. Which might not seem like much over 5 years it will save you maybe $60.

Though it does pay a lot to pay down an 8% loan, (or to refinance it), especially since car loans don't get special tax treatment it is all after tax dollars, paying an extra $100 today will save you $8. To get that sort of return by investing you will need to find a stock that returns you 9.4%, or a savings account giving you 10.6% if you are in the 25% tax bracket.

Anyway, the timing does make a little difference, but not that much, it is easier to just pay it off quicker, say in 4yrs at $439.43/month, for ($18,000).

Shopping around for auto loans might help too, my credit union offered 3 yr loans at 3.75%, so I refinanced, they charged no fees either. I refinanced out of a 5yr loan at 6.75%, 5 months in.

[EvelynTN]

Your principle and interest will change with every payment, even if the time periods are the same. Here is how it works, roughly:

When a bank receives your payment, they first apply a portion of your payment to cover the accrued interest. Then, whatever is remaining they apply to the balance (or principle). The reduced balance is what the next period's interest is calcuated off of.

Generally speaking, interest rates on car loans are acrrued daily (as opposed to mortgages that are accrued monthly). Here is an example to give you an idea of how it all works:

You car loan is $18,000. The interest rate is 8.5%. The daily periodic interest would be (.085/365) = .00023288.

If you make a payment of $400 30 days after you take out the loan
your interest that has accrued is (.00023288 x 30 x 18,0000=)$125.76
Your payment would consist of $125.76 interest and (400-125.76=)$274.24 principle.

If you make a payment of $400 30 days after the first payment
your interest that has accrued is (.00023288 x 30 x (18,0000-274.24=))$123.84
Your payment would consist of $123.84 interest and (400-123.84=)$276.16 principle.

So, even though both payments had the same time period and same payment amount, The second payment had a lower interest payment. This is because the second payment had a lower beginning principle balance (17,725.76 versus 18,0000).

The best way to lower the amount of interest you pay is to pay early and to pay extra, if possible. All extra payments should be applied to principle, which will reduce the interest paid on the next payment.