Interest on loan question

[pam]

I have a question.  It might seem dumb but I really don't know.

I have a car loan.  I get my statement each month and it shows how much of the payment went to principle and how much went to interest.  I know there is a daily interest.  

My question is...say my payment due date is the 30th of each month but I make the payment on the 15th of each month.  Two weeks ahead of the due date. Does the daily interest start when I've made the payment?  Or does the daily interest start on my due date?  Am I saving interest paying it 2 weeks early each month?

 

[Guest]

Short answer: It shouldn't make any difference as long as you don't pay late.

LONG ANSWER:

1) Normally car payments are compounded on a monthly basis.  And the payments are considered on a monthly basis as well.  So no matter what day you pay (as long as it's not late) they will calculate the same interest.

2) If you make extra payments then often the lender will make it difficult for you to count it towards principal.  So, the extra money is just considered "early payment" for the next month and so forth.  If you want it to go towards the principal, you generally have to either fill out a form or call into customer service and they have a procedure.

[LeSellers]

On 2/24/2016 at 2:27 PM, pam said:

I have a car loan.  I get my statement each month and it shows how much of the payment went to principle and how much went to interest.  I know there is a daily interest.

Daily interest for a car loan is rare. Not unheard of, but rare.

On 2/24/2016 at 2:27 PM, pam said:

My question is...say my payment due date is the 30th of each month but I make the payment on the 15th of each month.  Two weeks ahead of the due date. Does the daily interest start when I've made the payment?  Or does the daily interest start on my due date?  Am I saving interesting paying it 2 weeks early each month?

Check your contract. If it really is daily interest, then paying before the due date does, in fact make your loan go away faster.

On a related note, if you have a mortgage (usually due on the first), and you regularly pay on the fifteenth of the month, there is typically no penalty. But, when you make that 360th payment, you will not have paid the loan off: there will still be dozens of additional payments because the interest accrued for those two weeks every month will add thousands of dollars to the loan and tens of thousands to the interest load.

If, on the other hand, you pay a few days early (say the 25th of the previous month), your loan will be paid off two or three years early.

Compound interest is not your friend.

Lehi

[beefche]

I don't know the answer to your question, Pam.

I have had 3 cars and I've paid all 3 off early. With the last car, I went to the bank to pay the remainder of the car loan and while I had the money in the checking account, I thought I would go ahead and use my credit card (to get the rewards points) to pay off the loan at the bank and then once home, I would pay the credit card balance immediately. Thankfully, the bank teller knew that if I used my credit card, it wouldn't be a "credit" but considered as "cash"--which has a fee and higher interest rate that applies immediately upon using the "cash" option. She saved me a lot of money and a lot of anger had I used my credit card.

[NeedleinA]

On 3/3/2016 at 8:21 PM, beefche said:

it wouldn't be a "credit" but considered as "cash"--which has a fee and higher interest rate that applies immediately upon using the "cash" option. She saved me a lot of money and a lot of anger had I used my credit card.

This whole situation reminds of the "things I don't know" in life. Thanks for sharing. 

It also reminds me of a s-u-p-e-r dumb rule on Ebay gift cards. You are limited to spend $500 on your gift card in a 30 day period. We had Ebay gift cards from work in the $1000 range. Won bids in the $700 range. Could only use $500 GC and had to cough up $200 real money. D-u-m-b! 

[mirkwood]

If you are paying extra money, make sure you can mark it to go to the principal.  I don't know if it affects daily interest, but over time is reduces your overall interest paid.  We have been doing that on our house for years now.  The last several years our principal payments have been significantly larger then our interest payments because of this.  Our 30 year loan will be much shorter too.

[Guest]

On 3/3/2016 at 7:45 PM, LeSellers said:

On a related note, if you have a mortgage (usually due on the first), and you regularly pay on the fifteenth of the month, there is typically no penalty. But, when you make that 360th payment, you will not have paid the loan off: there will still be dozens of additional payments because the interest accrued for those two weeks every month will add thousands of dollars to the loan and tens of thousands to the interest load.

This is only true if the loan you have is compounded daily.  A HELOC is such a loan.  And a few mortgage programs out there have such conditions.  But the standard type of mortgages that most people tend to have has no such penalty.  They only penalize the last month because they pro-rate the final payment's interest.

[LeSellers]

9 hours ago, Carborendum said:

This is only true if the loan you have is compounded daily.  A HELOC is such a loan.  And a few mortgage programs out there have such conditions.  But the standard type of mortgages that most people tend to have has no such penalty.  They only penalize the last month because they pro-rate the final payment's interest.

I worked in the legitimate debt-elimination field for a couple of years. What you say is not, in my experience, accurate. All loans, mortgages, consumer loans, and so so, are calculated on daily-interest, with rare exceptions (mostly private "hard money" loans).

Lehi

[Guest]

And I actually read the documents I sign.  And apart from the HELOC I once had, every mortgage has been as I have described it per the actual paperwork.  Show me the documentation that says otherwise.