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  1. #1
    Senior Member bryroth's Avatar
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    If I overpay a car payment by thousands of dollars, do my remaining payments go down?

    There wasn't enough room to post the whole question int he title. So here it is: If I overpay my car payment one month by thousands of dollars, which of the following happens?

    1. My remaining car payments are decreased.

    OR

    2. I pay the car off faster, but the monthly payments stay the same.

    I rent where I live and I've never financed a car before - just paid cash for used cars. Could somebody help me out with this basic question?

    Thanks!

  2. #2
    Riding Heaven's Highways on the grand tour ModoVincere's Avatar
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    Unless you contact the financing company and they agree to reamortize the loan, then the payments will remain the same and the loan will pay off quicker. However, you need to make sure the loan does not have a prepayment penalty provision. If so, there's probably not much point in making extra principle payments.
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  3. #3
    Seņor Member USAZorro's Avatar
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    Make sure all that you overpay goes towards the principal - not the interest. Contacting the institution where you got the loan is the best start.
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    The overpayment will go towards the principle and you will pay the car off sooner but the payments will stay the same. Use the amortization calculator on bankrate.com to see what I'm talking about. You can show making a 1 time extra payment and it will recalculate the payoff date for you

  5. #5
    You Know!? For Kids! jsharr's Avatar
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    As others have stated, the terms of the loan will go far in dictating what will happen if you overpay. Paying off principal is the way to go and yes, you do need to find out if there is a prepayment penalty. Call the loan originator and ask them, then make your informed decision.

    I have 0% interest on my Ford, so I have no real incentive to pay it off early. What is your interest rate?
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  6. #6
    Senior Member skiahh's Avatar
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    One more for terms of the loan. Some loans are structured so that extra payments are applied to additional payments. That means you'd just not have to make payments for a while. Others that are set up as simple interest, you can direct the additional towards principal. For those, you can ask for a re-amortization or you can just continue paying the regular payments and be done much quicker and pay less interest. If you re-amortize it, they'll re-calculate the rest of the payments over the remaining time, lowering your payments. You'd have to calculate out the re-am vs the higher payments until paid off to see which is cheaper in terms of interest cost.

    Oh, and as mentioned, make sure you NEVER sign a loan with a pre-payment penalty!!

    0% is the best... no incentive to pay off using someone else's money!

    Other than that, sign up with your local credit union for your loan.
    Last edited by skiahh; 05-10-10 at 10:48 AM.
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  7. #7
    Senior Member longbeachgary's Avatar
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    With my car company, I overpaid by thousands and received a regular monthly bill with ZERO due for the month so the length of the term stays the same and once you haven't made a payment for however many months, the payment amout for the month will be the same.

  8. #8
    Senior Member travelmama's Avatar
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    Quote Originally Posted by ModoVincere View Post
    Unless you contact the financing company and they agree to reamortize the loan, then the payments will remain the same and the loan will pay off quicker. However, you need to make sure the loan does not have a prepayment penalty provision. If so, there's probably not much point in making extra principle payments.
    This is correct!
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    Senior Member DannoXYZ's Avatar
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    Quote Originally Posted by longbeachgary View Post
    With my car company, I overpaid by thousands and received a regular monthly bill with ZERO due for the month so the length of the term stays the same and once you haven't made a payment for however many months, the payment amout for the month will be the same.
    1. The problem with this scenario is that you still end up paying them the same amount of interest and the loan will still cost you the same in the end. Other possibilities:

    2. extra payment goes towards interest. You end up saving a little money compared to your current terms.

    3. extra payment goes towards principal. Since interest is compounded daily on principal balance, you save a TONNE of money by the end of the loan. You'll have it repaid months, if not years earlier by applying extra payment to principal.

    BUT, you usually have to explicitly tell them where that extra money is going. Most places will just apply it to future payments since they'll make the most money that way. Applying it to interest is the next most advantageous to the bank. You want to apply it to principal and typically you'll have to tell them that. And depending upon the terms of the loan, you may have an early-payment penalty.

  10. #10
    Portland Fred banerjek's Avatar
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    Quote Originally Posted by DannoXYZ View Post
    BUT, you practically always have to explicitly tell them where that extra money is going. Most places will just apply it to future payments since they'll make the most money that way. Applying it to interest is the next most advantageous to the bank. You want to apply it to principal and typically you'll have to tell them that. Even if you make this crystal clear in writing, follow up and make sure that's what they actually did because an incredible percentage of the time, you'll find they ignored your instructions and simply applied it to interest or your next payment. Be ready to give them some heat. And depending upon the terms of the loan, you may have an early-payment penalty.
    Fixed

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    A lot of people here don't understand the terms of their loans, though some do.

    How prepayments get applied should be specified in your loan documents. If you can find a copy, it shouldn't be too difficult to figure out.

    Usually, for an amortizing consumer loan (i.e. a loan that's repaid through series of periodic, typically monthly, payments), the loan documents will say that payments will be applied to remaining installments in inverse order of maturity. That means that your monthly payments won't be reduced - though you will repay the loan more quickly. The prepayment will typically be applied to accrued and unpaid interest, then to principal. This means that your principal balance will be lower going forward, and less interest will accrue. This works to your advantage. For example, if your monthly payment is, say, $500, and you make an extra payment of $500, the result won't just be that you won't have to pay the last installment - depending on where you stand (and how high your interest rate is), the second-to-last installment will also be reduced by some amount. In a sense, you're getting the most bang for your buck this way.

    A bank typically won't want to re-amortize a loan (adjust the amount of monthly payments) unless the current market interest rate is higher than your rate, and they'll want to reset to the current market rate. You don't want to do this.

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    You cannot apply additional payment to the interest, only the principal. The interest is a function of your interest rate and your balance. If you start to claim additional interest payment, the IRS will start to cry foul.

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    Senior Member DannoXYZ's Avatar
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    "you" is relative. The OP will send in the extra $1k and the bank will apply it to interest (most common practice). Then the IRS won't let him claim the extra payment as interest. He'll be screwed by both sides.

  14. #14
    Peloton Dog patentcad's Avatar
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    I pay the car off faster, but the monthly payments stay the same.





    This.

  15. #15
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    Quote Originally Posted by DannoXYZ View Post
    "you" is relative. The OP will send in the extra $1k and the bank will apply it to interest (most common practice). Then the IRS won't let him claim the extra payment as interest. He'll be screwed by both sides.
    No.

    What the bank says is interest, the IRS says is interest. The IRS just reads the bank's 1099.

    But this is kind of beside the point: People are way too wound up about whether a payment gets applied to interest or principal. It scarcely matters, at least on an amortizing loan with monthly payments. The interest all gets paid monthly anyway. The difference between whether a payment you make on the 15th gets applied first to interest, then to principal, vs. all to principal is a matter of a few dollars, when you're going to pay the interest on the 1st anyway.

  16. #16
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    Just for reference, we paid our first house off in 9 years. Had a 15 year loan. My wife made an extra payment toward the principal every month(that we could). It saved us THOUSANDS.

  17. #17
    Portland Fred banerjek's Avatar
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    Quote Originally Posted by Starch View Post
    But this is kind of beside the point: People are way too wound up about whether a payment gets applied to interest or principal. It scarcely matters, at least on an amortizing loan with monthly payments.
    This could not be more incorrect.

    If a payment is applied towards interest, the effect on the total amount you pay is zero -- you just pay off slightly earlier. If it is applied toward principal, it reduces the total amount you owe. Even though you monthly payment doesn't go down, the principal component is greater meaning that the amount going to interest is reduced. The amounts you can save are huge.

  18. #18
    Portland Fred banerjek's Avatar
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    Quote Originally Posted by dragracer View Post
    Just for reference, we paid our first house off in 9 years. Had a 15 year loan. My wife made an extra payment toward the principal every month(that we could). It saved us THOUSANDS.
    If not tens of thousands. On a longer loan, that would be guaranteed.

  19. #19
    Fax Transport Specialist black_box's Avatar
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    If you have good financial discipline, put the extra payments into a savings account that earns you interest (do not invest in anything that can lose value). Rates aren't too hot right now, but its better than nothing (and for mortgage money in the 10's of thousands, it can be large regardless of the rate). Once you have the cash to pay off the loan, you do it in full.

    1) if you NEED cash, you have it, instead of having to take out a home equity loan.
    2) you're paying off the loan with tomorrow's 'inflated' dollars (more of an effect with a long term loan). "$100.00 in 1995 had about the same buying power as $144.25 in 2010."

  20. #20
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    Quote Originally Posted by banerjek View Post
    If not tens of thousands......
    Exactly. We threw away a lot of money when we were younger. After a few years we figured out how to play this game. Everyone in the family now comes and asks my wife how they can save money or what she would do in their situation. We still throw away a lot of money, but it's on stuff we want to waste it on.

  21. #21
    You Know!? For Kids! jsharr's Avatar
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    BTW, if you owe less that $1999 on the car, do not overpay by thousands, you will just be wasting money.
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    Quote Originally Posted by colorider View Post
    Phobias are for irrational fears. Fear of junk ripping badgers is perfectly rational. Those things are nasty.

  22. #22
    Portland Fred banerjek's Avatar
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    Quote Originally Posted by black_box View Post
    2) you're paying off the loan with tomorrow's 'inflated' dollars (more of an effect with a long term loan). "$100.00 in 1995 had about the same buying power as $144.25 in 2010."
    True, but once you're paid off, the money you could be losing on interest can be invested (boosting your income), or you can afford schwag while it's cheaper.

    For most people, paying off debt is the way to go.

  23. #23
    Fax Transport Specialist black_box's Avatar
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    Quote Originally Posted by banerjek View Post
    True, but once you're paid off, the money you could be losing on interest can be invested (boosting your income), or you can afford schwag while it's cheaper.
    For most people, paying off debt is the way to go.
    yeah, the idea is still to pay it off as soon as possible in full. If you pay 50k against a 125k mortgage today, your monthly payments (specifically, interest payments) are not going to change unless you refinance or re-amortize. You still have to come up with another 75k to pay the whole thing off. While you're saving up that final 75k, wouldnt it be nice to be earning 2% on the 50k? You'll pay income tax on the interest, but thats still an extra $750 per year in your pocket assuming 25% tax rate.

    of course, this approach worked much better when savings accounts were handing out 3-4%, but it still helps.

  24. #24
    Cries on hills supton's Avatar
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    You should always have some cash ready for an emergency. We're dipping into ours to do a roof; I'm guessing we'll pay less on our loans to bring it back up to where we feel comfortable. I wish it was like 6 months of income saved up, but the only way we could stretch it that far would be to ask the bank if we could pay just the interest on our mortgage (which is what I'd do if I was unemployed anyhow).

    Always find out the terms of a loan up front! Make sure pre-payment has no penalty. And always, always, ALWAYS pay above the min amount required! It saves money in the long run--plus, if you can't afford to pay extra, were you really able afford it in the first place? [Ok, I realize that's not true in all cases. I just think we should ask ourselves more often before we jump into loans. We've all heard too many stories of people living beyond their means as if it was "normal".]

    I'm kinda sad that the payment books went away. Every so often, rather than paying say 20% over the min amount (with the extra to the principle), I'd just make two minimum payments. That way, I'd be a few months ahead. If anything happened--well, I could just skip a payment. Today, I don't think those booklets are used anymore, it's all monthly statements. But usually, even if it asks for $0, we just pay it, since it was budgeted for.
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    J D Byrider

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