FRS finance question

[Celica00]

I've bought the frs in april 2012 and made my first payment on it in july 2012 for a loan totaling 29000 after fees, taxes, and options. since then, I've paid $7100 and removed the extended warranty and gap insurance and was credited 900 dollars so that's a total of $8000.

I checked my payoff amount and it was just under 25k. how can it be that high still after over a year and a half of payments? w/ my APR being 3.85, that equals $1100 a year in interest so I should've only paid about 1600 in interest to the loan and the rest should be principal which should equal my loan to be about k22.6 left.

am I getting screwed or is my math off?

[wheelhaus]

The interest isn't calculated as easily as you think. Interest isn't averaged to apply evenly over each year for the life of the loan, it's based on how much the principal loan is worth each day/month, and then applied to the next payment. So, the beginning payments include a larger portion of interest than the later payments. Each payment you make reduces the loan by whatever is left in your payment after interest has been calculated.

If your loan was worth $29,000, then the first year and a half may have only paid off a few thousand.

Look at it this way:
If the loan is worth 25,000, with 3.85% APR, That's $962 in interest over the year. However, that's not how it's paid. Divide $962 by 12, and apply that to the monthly payment (about $80). The remainder amount that's needed to reach your monthly payment is then added ($80+$295 = $375 or whatever your payments are), and that's what is applied to the principal loan. If your monthly payments are say $375, then $80 of it was interest, and only $295 went to the loan from payment #1.

Next payment, take $25,000 and subtract the $295 that's left over from your payment and you get $24,705, and repeat the same APR calc (calculate for 12 months, then divide by 12 to get interest of that month), you get $79.25 in interest that gets applied into payment #2. So if your payments are $375, only a portion of it is actually paying off the loan.

Now, imagine a really high 20% APR, and you can imagine how long it would take to get the loan value down. Your payments would be huge, because the majority of each payment would go to interest...

Check this link:
http://www.bankrate.com/calculators/...alculator.aspx
Put in your info (for the original loan, or for the refi loan) and click the "Show/Recalculate Amortization Table" button see how the interest is calculated and applied each month, and how it affects the total loan value. It's a real eye opener to understand how the process actually works. The BEST way to save interest is to pay off as early as possible. 3.85% in interest over a 36 mo. loan is worth exactly the same if you have a 72 month loan, but pay it off as if it were a 36mo loan.

[Celica00]

Thank you, I hate how the process works because it feels odd to me. but I understand it now. the feeling of spilling my money into a lot of interest is really irritating but hey, I signed up for it.

[Frstorm]

Celica- if you just put an extra hundred or two on principal every month you will see great gains. Also if you do this you must specify its for principal only or they will just put it towards your next payment.

[Celica00]

Originally Posted by Frstorm

Celica- if you just put an extra hundred or two on principal every month you will see great gains. Also if you do this you must specify its for principal only or they will just put it towards your next payment.

I pay electronically, so would I have to call the company w/ my loan and specifically tell them afterwards, or just pay my bill over the phone?

[allykim]

The interest accrues from day 1 of your financing. I paid off my car in less than 45 days and the interest was over $80 with the interest at like 3% or something

[Porsche]

Originally Posted by Celica00

I've bought the frs in april 2012 and made my first payment on it in july 2012 for a loan totaling 29000 after fees, taxes, and options. since then, I've paid $7100 and removed the extended warranty and gap insurance and was credited 900 dollars so that's a total of $8000.

I checked my payoff amount and it was just under 25k. how can it be that high still after over a year and a half of payments? w/ my APR being 3.85, that equals $1100 a year in interest so I should've only paid about 1600 in interest to the loan and the rest should be principal which should equal my loan to be about k22.6 left.

am I getting screwed or is my math off?

It could be both.

For instance, you say, "...after over a year and a half of payments," yet from July 2012 through August 2013 is only 14 months, a long ways from the 19 months that would be "over" a year and a half.

Not picking on you here, Celica, just saying that in financial math we need EXACT numbers.

So, if you'd like to provide the EXACT numbers from your finance papers, including the total loan amount (principal), the term in months, interest rate, and the exact number of payments you've made so far, then I can tell you to the penny what your outstanding balance is following your most recent payment.

With these loans the consumer is paying interest on the DECLINING BALANCE. Initially, the balance is large and the amount of your monthly payment that goes to interest is large. Maximum dollars are applied to the interest on the very first payment, which leaves very little to apply to reducing the principal ... while minimum dollars are applied to the interest on the final payment, thus leaving more to pay off the remaining principal.

When I took some guesstimate figures for your loan, I agree that $25,000 balance seems high. But, give me the EXACT figures, and I'll compute the correct answer for you.

Peace of mind is good, and I'm glad to take a few minutes to help you out here.

Note: I have seen lenders get these figures wrong repeatedly. In fact, I have found the online calculators provided on some of these banking sites to be wrong! I kid you not.

Originally Posted by Celica00

Thank you, I hate how the process works because it feels odd to me.

Well, of course, and that's why it's worth the trouble to put in a little study of consumer math and finances to both avoid being victimized and to enjoy peace of mind. My wife teaches adults math in a technical college, and she focuses on consumer math as the principal subject to illustrate concepts, etc.

the feeling of spilling my money into a lot of interest is really irritating

Ain't it the truth?

And that's why the bankers have yachts and the customers have rowboats.

[Frstorm]

Celica- you can just put money towards principle online. I did this all the time with my old tc

[BadMoon]

Originally Posted by Celica00

Thank you, I hate how the process works because it feels odd to me. but I understand it now. the feeling of spilling my money into a lot of interest is really irritating but hey, I signed up for it.

You want to really freak? Buy a new home. After a years worth of payments we still owe a ton.

[jflogerzi]

Originally Posted by BadMoon

You want to really freak? Buy a new home. After a years worth of payments we still owe a ton.

haha so true. But its the nature of the beast and the only way most people can afford a house! :P But from day one I am trying to pay a little extra to the principal. I have hoping to shave off about 5-7 years on my 30 year loan this way.

[Porsche]

Originally Posted by BadMoon

You want to really freak? Buy a new home. After a years worth of payments we still owe a ton.

Yup.

I encourage people to "buy" the money for the house or car as carefully as they buy the house or car.

$100,000 mortgage over 30 years @ 5.31% interest rate will cost $100,135 FOR THE MONEY ALONE. That's $100,135 in interest on a $100,000 loan. A higher interest rate would have you paying significantly MORE for the money than you're paying for the house.

By the way, the monthly payment on that mortgage above is $555.93 for 360 months, or $200,135 total repaid.

After the 12th monthly payment, i.e. one year, the balance will still be $98,605.21. Only $1394.79 will have been applied to reducing the principal, while $5276.37 will have been paid in interest cost.

It pays to be an educated consumer.

Shop wisely.

[Frstorm]

Porsche- that's why I'm a firm believer you Ust live in the house five years just to break even after all the fees and what not. I'm a firm believer in at least 20% down so you have no pmi fees and to at least pay 100 on top of payment directly to principle a month.

[Porsche]

Originally Posted by Frstorm

Porsche- that's why I'm a firm believer you Ust live in the house five years just to break even after all the fees and what not. I'm a firm believer in at least 20% down so you have no pmi fees and to at least pay 100 on top of payment directly to principle a month.

As the years unfold, excellent strategies like yours will place you far ahead of those who did not do these things.

Well done.

[Frstorm]

Porsche- I just refuse to flush a couple hundred a month down the toilet for pmi. My goal is to buy a beach condo soon through a condominium that will rent it out for you so by the time I'm old ill have 2 places paid off with my current house netting me 1500 a month to have extra income when I retire on the beach