Interest & Snowballing

**3tomboys** · 07-29-2008, 11:08 PM

We recently purchased a vehicle (week prior to joining FV) and I always ask if their is any pre-payment penalty when we purchase these types of items. The finance guy said No and went on to explain that if we were going to make a larger payment each month I needed to be sure to send the payment coupon with the extra payment under principal otherwise they would place the extra towards my next payment and still charge interest. So this got me thinking, we have been paying down (snowballing) dh motorcycle for sometime and I looked at the last statement and it shows that I don't owe a payment for sometime. I normally pay on line but I feel like I am ripping myself off (interest) by not specifyling that the extra is towards principal. Am I not getting a break on the interest by not specifying and if so is it the same with the mortgage?

I hope this makes sense.

**Greebo** · 07-30-2008, 06:16 AM

Originally Posted by 3tomboys

We recently purchased a vehicle (week prior to joining FV) and I always ask if their is any pre-payment penalty when we purchase these types of items. The finance guy said No and went on to explain that if we were going to make a larger payment each month I needed to be sure to send the payment coupon with the extra payment under principal otherwise they would place the extra towards my next payment and still charge interest. So this got me thinking, we have been paying down (snowballing) dh motorcycle for sometime and I looked at the last statement and it shows that I don't owe a payment for sometime. I normally pay on line but I feel like I am ripping myself off (interest) by not specifyling that the extra is towards principal. Am I not getting a break on the interest by not specifying and if so is it the same with the mortgage?

I hope this makes sense.

What is the normal payment amount? How much did you pay last month? On your last statement, does it show how much of the payment went to principle and how much went to interest? Its *possible* that the guy was right - although it sounds fishy. Any extra money you pay today should be applied, TODAY, to principle, which should save you interest in the long run no matter what the next "payment due" date is. I'm thinking, in fact, that they shift the payment due to encourage you to let that remaining principle sit there and accumulate a LOT of interest so they don't lose out as much.

Post the #'s I asked about and we'll figure this out.

If you can post pretty much every detail from the statement but your own personal info, that'll help.

Now - more importantly - if you're going to borrow money on a vehicle (which you shouldn't, but thats another topic), one thing you should NEVER do is finance it through the dealership. The finance department is the biggest profit center for the dealers. Not the cars - the financing. Those financial deals available from dealers are sold to total scumbag lenders who will try to screw you over any way they can.

Example: Friends of ours who had fallen a couple months behind a few years back had a promise that the loan would be rehabilitated if they made regular payments again (the past due amount would be rolled into principle). Last month, after making payments on time for a year, they REPOD our friends car. They never rolled the balance in, and then took the last 3 months payments and used them to pay the OLD past due amount, and now my friends have to scramble to raise $1300 + $25 a day. They'll have the car back on Friday if all goes well but talk about scummy behavior on the lenders part!

Go to a reputable bank, get pre-approval for a loan for a vehicle. Go to the dealer, sign the paperwork. They WILL let you drive off the lot on a signature and a trade-in. Go back to the bank, complete the loan, and take the check the bank issues you to the dealership. Deal with the bank.

But better yet - pay cash.

**cheles2kids** · 07-30-2008, 08:20 AM

I can only speak through our experiences.
But yes & yes.

If you are sending in extra money each month you need to make absolutely certain, whether for mortgage, or vehicle loan, that you specify that you want it towards principal only.

I would even go as far as to write an extra check each month, to help keep it separate and make absolutely certain that you check your account every month to make sure that it's been applied.

If not, call your finanancial institution to find out why.

As for the motorcycle "pre-payments" as it's showing now, I think it would be worth a call to them to see if they can redistribute that money to the principal.
Explain to them what the extra money was meant for and see if someone can reset your account to show those extra payments credited towards the principal.
They might or might not do this, but it's definately worth a try.

**Lorelei** · 07-30-2008, 10:47 AM

What the finance guy told you is pretty much standard practice. Some people send in extra money to get ahead on payments and some want it to go to principal. If you don't specify, the financial institution puts it towards payments, which gives them more interest. Be sure to specify you want the money to go to principal and find out if there is a certain day you should make payments. At our credit union, in order for ALL the extra money to go towards principal we need to make the principal payment on the loan due date.

**Wendy99** · 07-30-2008, 10:52 AM

We have a line of credit open, should we not be able to pay cash for our next vehicle I would use the line of credit that way I can pay as much as I want to when I want to and not worry about having to reapply. Now we don't use them for anything, but if I had a major purchase that was necessary and my EF didnt cover it yet , that is what I would do.

**MomToTwoBoys** · 07-30-2008, 12:50 PM

I think you'd be doing a ton of good in the long run if you send that payment in with a note attached to it saying that it's for the principle and not for a regular payment. This is especially true if your interest rate is really high.

For example, I'm having DH contact Wells Fargo and TD Canada Trust (who has his checking account and his VISA) and telling them that any extra payments are being applied to the principle balance. I'm doing the same with the Mastercard. We won't be touching any of those balances with the debt snowball until October, so that gives us two or three months for them to make the adjustments. Our first debt snowball target is set up to where any interest accrued on the balance is delayed three months and by then, we'll have that amount paid off. Here's our debt snowball plan:

Best Buy - 287.52 applied each month (paid off by Oct '08)
Wells Fargo - 287.52 + 53 applied each month (paid off by Jan '09)
VISA - 287.52 + 53 + 119 applied each month (paid off in Feb '10)
Mastercard - 298.75 + 53 + 119 + 40 applied each month (paid off in June '10)

Each payment is still subject to interest charges but the extra payments will cut that principle down drastically.

**3tomboys** · 07-30-2008, 01:41 PM

I have not made any extra payments to the car yet, this will start happening after the motorcycle is paid off. As far as the motorcycle goes the monthly payment is $306.00. We owe $4800.00. Last month we paid a total of $750.00. The bill we receive does not show any kind of a breakdown. (I am at work so I will have to bring the bill with me tomorrow and call them for a breakdown). We have always paid extra and for quite a while now we have been showing no payment due. Our goal is to have it paid off by the end of October. We would have waited on the car but the old one wasn't holding up. We have been in a habit of paying things off early for some time (our previous car and my husbands previous motorcycle) I am sure that they (loan companies) have made quite a bit of interest from us in the past but I would like to stop this trend and do the snowballing correctly. My break is over so I hope I have answered the questions and Thank You for all of your advice, it is greatly appreciated. I love Frugal Village!