How to Calculate Extra Principal Payments on Auto Loans
Whenever you make a car payment, a portion of your payment goes toward paying the interest on the loan and the remainder of your payment is applied to the loan's principal--which is the amount you originally borrowed. If you choose, you may make larger or more frequent payments on your auto loan in order to pay down the balance more quickly. If you would like to pay off your auto loan early, you must calculate the correct payment amount each month to reach your goal.
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Instructions
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Choose a date by which you would like to pay off your auto loan.
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Calculate the number of months between the current month and the month in which you would like to pay off your auto loan.
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Divide the loan balance by the number of months you have given yourself to pay off the loan. The number you are left with is the payment you must make each month toward the loan's principal to meet your goal. For example, if you would like to pay a loan with a balance of $6,000 in one year and your current monthly payment is $250, you would need to pay an extra $250 each month in addition to your current payment to meet your goal.
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Find out if your lender uses simple or compounded interest. This will determine how much interest you will owe as you pay down your loan balance. You must take the interest rate into consideration when calculating the amount you will need to pay each month to meet your payoff goal. Auto lenders have different methods of applying interest to your account. Check with your lender to find out how making extra payments will affect the interest charges on the loan.
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Send a notice to your lender with each payment stating that you would like the money to be applied to the principle of the loan. If you do not specify how you would like your extra payments to be applied, your lender may opt to apply the payments toward the interest--thus complicating your efforts to pay your loan off early.
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Tips & Warnings
Check to ensure that your auto loan does not carry a prepayment penalty before attempting to pay if off early. If your loan carries a prepayment penalty, paying off the loan early will not save you money.
Some lenders will not allow you to make payments on the principal before you have paid off the full interest balance on the loan. Read your loan agreement to ensure that you are allowed to make payments toward the principal if you still have outstanding interest charges on the account.
