#LoanPrincipalImpact 💸
Hey there! So you’re looking to finance a car and have the ability to pay off the principal over time. That’s great! But you may be wondering how that will impact your future payments based on the interest you have already paid. Let’s break it down for you.
## Understanding Loan Structure 📊
Loans are typically structured so that you pay off the interest first before the principal. This means that in the beginning, a larger portion of your monthly payment goes towards interest, with a smaller portion going towards the principal. As you make payments over time, the balance shifts, and more of your payment goes towards the principal.
## Impact of Paying Off Principal Early 💰
When you pay off the principal on your loan, it reduces the overall balance that interest is calculated on. This can lead to a few different outcomes:
– **Lower Total Interest Paid**: By paying off the principal early, you are reducing the amount of time that interest accrues on the remaining balance. This can lead to paying less interest over the life of the loan.
– **Shorter Loan Term**: Paying off the principal early can also shorten the length of your loan term. This means you may be able to pay off the loan faster and save on interest.
## Recalculating Monthly Payments 🔄
In terms of how paying off the principal impacts your future payments, it really depends on the terms of your loan. Some lenders may recalculate your monthly payment based on the reduced balance after paying off the principal. This could result in a lower monthly payment due to the decreased amount owed.
## Recommendations and Considerations 💡
– **Check with Your Lender**: It’s always a good idea to check with your lender to see how paying off the principal will impact your loan terms and monthly payments.
– **Consider Refinancing**: If you’ve paid off a significant portion of the principal and your lender is not adjusting your monthly payments, you may want to consider refinancing your loan to take advantage of the lower balance.
Remember, paying off the principal early can have a positive impact on your overall loan terms and help you save money in the long run. Just be sure to fully understand how it will affect your specific situation and loan terms. Good luck with your car financing journey! 🚗💰
The more that you put towards principal, the faster the loan is paid off. It moves you further along the amortization chart so that the next payment has a higher % of principal as opposed to interest. The money isn’t lost.
> Since loans are structured to pay off interest first,
You might not know how amortization works.
The interest you pay is based on the remaining principal. The more you pay down the principal, the less interest you’ll pay each month.
> how’s is my rate changed based on the interest I have already paid?
The interest rate never changes unless you refinance the loan (OR if you have something like an Adjustable Rate Mortgage, which is rare these days, at least in the US). Again, you gradually pay less and less interest over time, but that’s because there is less principal accruing interest, not because the actual rate changes.
Loans are not structured to pay off interest first. Every dollar extra you pay you no longer pay interest on that dollar
Loans are arranged in such a way that the payment is fixed because you have a principal and computed interested. Money up front can change your monthly as it reduces the principal (and therefore the interest paid over the agreed upon time frame).Â
Money on the back end just makes the loan shorter because extra payments go to the principal, so you pay it off faster….but it doesn’t change your monthly. If your loan is X/month for Y months and you pay 2X one month you will still owe X every month, but for Y-1 months.
Most car loans are set up based on the following criteria:
* Total amount financed (or principal)
* Interest rate
* Number of monthly payments
These criteria set your monthly minimum payment. Once they are set, the interest rate and the monthly payment are set for the duration of the loan.
Interest is charged on a monthly basis, based on the remaining principal. Assuming no late payments, the monthly payment should always cover the interest accrued, plus some principal. That is why, at the beginning of the loan, the largest percentage of your monthly payment is going to interest, but over time, it trends towards principal.
Assuming there are no prepayment penalties, paying extra on principal will reduce the principal for the next interest calculation, that is how it saved you interest. And it also means a larger percentage of your monthly payment goes towards principal, not interest.
Paying extra on the principal does not change the monthly payment. It either means you pay off the loan sooner, or they apply it to the next due date. So when you do make an extra payment, a lot of times you need to be very specific to tell them to apply it to the principal, not the next due date.
>Since loans are structured to pay off interest first
Looks like you need a refresher on how loans work.
Say I take out a fictional loan of $10k at 12% interest. Each month, my interest is calculated based on the remaining principal balance using a very simple formula:
(remaining principal balance) x (interest rate) / (12 months)
So my first payment will accrue ($10k x 12% / 12months) = $100 of interest. If my minimum payment is $200, then that means I first pay that $100 of interest, and the remaining $100 will pay down the principal.
So the next month I calculate my new interest accrual as ($9.9k x 12% / 12months) = $99. I again pay my $200 minimum payment, which pays the $99 of interest and then $101 goes to paying down the principal.
So the third month, we keep going and calculate my new interest accrual as ($9,799 x 12% / 12months) = $97.99, meaning my minimum payment then pays down $102.01 of principal.
and that repeats until the loan is paid off. This process is called amortization. In the case of a car loan specifically, interest accrues daily instead of monthly, so all that does is changes is you accrue 1/365 of your interest rate per day, multiplied by the number of days, but the same general principal applies.
So if you make an extra principal payment, all that does is change that (remaining principal balance) number in that equation. it means that you will accrue less interest than you would have if you didnt make the principal only payment, which means more of your payment will go towards principal, which accelerates how quickly you pay off the loan.
>how’s is my rate changed based on the interest I have already paid?
Unless you have a variable rate loan, you rate doesnt change.