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Where does the interest go if you pay off a loan early?

Car loan question..Can a car loan force me to pay the full term interest?

  • I usually pay about $100 over the minimum payment, and the minimum payment seems to change every time. Last month, I payed close to the maximum payment ( which I didn't know would exist) at $700. This month, the maximum payment allowed is only $540. I got a fair interest rate with low payments on a 5 year payment plan. My initial plan was to pay the car off in the first 2-3 years rather than go the full 60 months and save myself a lot on interest, yet still have a low minimum payment if needed. I think I might have gotten hosed in the fine-print, and I'm still going to have to pay the full-term's interest. Has anybody else dealt with a loan like this? The loan is with Wells Fargo. Seems like it ought to be freakin illegal!

  • Answer:

    Chris is right about the pre-payment penalty. Read your loan agreement carefully and see if you have something like that. All lenders project a friendly, smiling "We're here to help you" approach. But they uniformly lend money to make money. When they loaned you money for your car, they expect to make a percentage of that as profit. It makes sense to me that if you give them their money back sooner, you shouldn't have to pay as much interest. But their loan docs are geared to make money, not necessarily to be nice to you. Best bet- read the loan agreement. With that, the amount you may pay might not be so much. http://www.drcalculator.com/mortgage/ is a good site. It's mostly for mortgages, but you can bring the term down to five years. Plug in your dollar figures and check the difference. Might be you're spinning your wheels over a sum that shouldn't get your blood pressure up. OTOH, if you're going to pay an unnecessary huge sum, you might want to re-finance (with a credit union) and pay off that WF loan. ... Take care!!

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First of all, I'm not sure why there is a "maximum payment". You should definitely find out why. Second of all, you need to find out if there is a "prepayment penalty" on your note, if there is, you will have to pay some of the interest as a penalty for prepaying.

Chris

You need to check the details of your loan. It is possible that you are making an installment payment of the principal plus anticipated interest for the full term. You can ask them now what your loan payoff amount is (for instance if you wanted to sell the car). It will be hard to determine how that compares with the situation where you would have been paying the minimum amount for 5 years. There is often a fee at the end of the loan in order for them to get you one last time as part of the title transfer/endorsement.

r_o_graham

The reason your min pymt is changing is because Wells has to recalculate your outstanding balance and total interest paid on the loan every time you overpay. Look at your contract again. It shows a min payment, int rate, total of payments, total interest paid on the loan, and the loan term. When you pay more, the extra money either goes to principal or interest on the loan. Either way, the amount you owe on the loan changes, and the bank has to figure out what that is. There is no "maximum payment". You could make a $5000 payment and Wells would have to recalculate the payoff again. Since you are paying off the loan quicker than agreed, you will pay less total interest. The total interest paid shown on your contract assumes you make the same min pymt every month until paid off. You are not doing that, you are paying more every month, so at the end you will have paid less interest. Remember, interest on the loan is calculated DAILY. Pay the loan in fewer days, pay less interest.

Uncle Bo

Ive never in my life heard of a minimum & maximum car payment. Your payment should be the same every month. Any extra DOES save you interest in the long run but the savings don't reflect in your payment until the end of the loan. If you pay 5 days early, you save 5 days worth of interest on the net payment amount. So paying early or extra always helps. But it never allows you to skip a payment.

Never

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