Paying off the principle

[official_george]

Can someone explain to me like I'm 5, how paying towards the principle of your car loan will result in less interests paid?

[Burrcold]

Because interest is only owed on the principle amount owing. Less principle owed = less interest paid

[official_george]

Can you give me an example? I can't seem to visualize it.

[jamies31]

you probably have a fixed rate open loan, so meaning if you signed on for a 60 month term but you pay it off in 48 you have just saved yourself a year of interest. Everytime you make a extra payment it will lower your term not your payment.
hope that helps

[official_george]

So payment towards the principal goes toward the "end" of the loan backwards?

[n2oinferno]

Here's an easy example without compound interest or anything confusing.

Let's say you owe someone ten dollars.
The interest you pay is one dollar per day.
Your minimum payment is two dollars per day.

Paid at the minimum amount it will take you twenty days to pay off this loan, and you will have spent twenty dollars. Ten dollars of that was the original principal, and ten dollars was interest.

Let's change it and say you pay three dollars per day on the same terms. This way, one extra dollar goes toward the principal. Now it will take you five days to pay off the loan and thus only five dollars on interest.

When you pay extra on the principal, that money goes directly to pay down the outstanding balance on the loan. In the end you pay less interest and the loan is paid off quicker.

Here's a site with a calculator that can give you a real idea of how much money you can save by putting as little as 20 bucks extra towards a car payment each month. You can look at the amortization calculator and see the actual breakdown of dollars as the principal is paid off faster.
http://www.bankrate.com/calculators/...alculator.aspx

Hope this helped.

[dem00n]

You must be in some knee deep shit if you gotta pay off some principle.

What school is this?

[shirker]

Lenders (like your bank) charge you interest based on how much money you owe them.

You borrow $10 from the bank. The bank charges $0.50 interest per day on every dollar you still owe them, where the amount you still owe them is $10 minus whatever you've paid them back on the loan.

When you at first owe them $10, the interest they make (and the extra interest you have to pay) is $5 per day. When you start paying off your loan, e.g. when you've reached a point where you've paid off $9 of your original $10 principal loan amount, the only interest they make on that $1 you still owe them is $0.50.

[jimmillion]

Originally Posted by official_george

So payment towards the principal goes toward the "end" of the loan backwards?

and now the breakdown for a 5 year old.

if your loan is for 60 months and you pay it off in 40 months you save money by not paying those extra 20 months of interest.

- you do this by paying more than the minimum monthly payments each month.

- you took out the 60 month loan originally because the interest rate was lower than the 48 month loan option.

hope that helps.