I'm dumb - can someone explain the difference to me? USAA auto loan.

Too40gawlf

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I have an auto loan through USAA. I took it out exactly a year ago and have been paying 30-50% more of the minimum payment every month to get the loan paid off quicker.

Now my question is this: When I go to make my payment every month, it gives me the option to make my regaular payment (principal + interest) or make a payment to the principal only. When I make a regular payment, it pushes back my 'amount of payments left' and my 'next payment due date' numbers. But when I make a principal only payment, my next due payment stays the same date and I still have x number of payments left.

Can someone explain this dynamic to me? What is the purpose of having the pricnipal only option? Is that a way to pay donw principal to reduce interest over the long term or am I missing something?
 

Mach1USMC

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It depends on how your loan is set up. What does the language say about principle. Or how the percentages are set up per payment. If its set up where the main part of the interest is paid off on the front end, everytime you make a principle payment you lower the amount of accumulated interest per payment. You usually have to specify that you are making a principle payment separate from your regular monthly payment. I'd call USAA to make sure everything is square if I were you.
 
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CobraBob

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I don't understand, as well, why if you are paying down the principle (assuming your payment is enough to reduce the number of months left) that the number of remaining months isn't changing. Definitely call them and find out.
 

ZYBORG

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If I am not mistaken, the reason for that is because USAA gives you the option (principal only) to pay towards the loan only BUT they still require your monthly interest dues on the loan (regular payment).

Its the bank's way of collecting their interest up front or as much as possible in case you pay off your vehicle early.

Hopefully that makes sense.
 
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01GTB

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I don't really think there is any advantage to making a principal only payment vs adding to your monthly payment. Both are shrinking the principal and saving interest charges since they compound monthly. But you are not altering the terms of the loan every month. The term and agreement is still the same.

By adding money to your standard monthly payment, you are making advanced monthly payments. At 40-50% additional you are making an advance payment every couple months and reducing the amount of payments left. But the terms are not changed. The payoff date is still the same. You simply have few payments left because you have already made them. You can either choose to continue at that rate and reach a balance of $0 which ends the loan or you can start skipping payments.

I guess making principal only leaves the same payment due every month so you wouldn't be tempted to skip simply because it showed no payment due.
 

Too40gawlf

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I don't really think there is any advantage to making a principal only payment vs adding to your monthly payment. Both are shrinking the principal and saving interest charges since they compound monthly. But you are not altering the terms of the loan every month. The term and agreement is still the same.

By adding money to your standard monthly payment, you are making advanced monthly payments. At 40-50% additional you are making an advance payment every couple months and reducing the amount of payments left. But the terms are not changed. The payoff date is still the same. You simply have few payments left because you have already made them. You can either choose to continue at that rate and reach a balance of $0 which ends the loan or you can start skipping payments.

I guess making principal only leaves the same payment due every month so you wouldn't be tempted to skip simply because it showed no payment due.

Hmmm,

This sounds like a great explanation. So in a sense the outstanding prinicpal is a festering pool of money that generates insterest and if you take a dip out of the pool each month, you are incurring less total interest? Whereas on regular payments, the total interest for the life of the loan has been calculated and factored into each average payment?
 

01GTB

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Pretty much. Though if you wanted to see a festering pool go back to the days of 10% plus interest :uh oh:
 

allister

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I'm pretty sure that when you pay extra, you want to pay extra towards the principle only. That way you're still making your regular payments but you'll save a lot in interest over the long run.
 

HYBRED

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Hmmm,

This sounds like a great explanation. So in a sense the outstanding prinicpal is a festering pool of money that generates insterest and if you take a dip out of the pool each month, you are incurring less total interest? Whereas on regular payments, the total interest for the life of the loan has been calculated and factored into each average payment?

Yes. One way you're getting ahead on payments over time, the other you're saving money on interest.
 

01GTB

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You're going to save the interest whether you add $200 to your payment or make your regular payment and make a separate $200 principal payment the same day. Principal balance owed should reflect that after the payment is made
 

assasyn

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Isn't the interest on an auto loan loaded up on the front end of the deal? He isn't saving money on interest payments like you would on a mortgage.
 

01GTB

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Interest payments are higher on the front end simply because the balance is high. But no, the interest is not all paid at the front end on the loan he has. The very last payment will have some interest. Not much because the balance is tiny. But it is there.

But if you we're going to make extra payments the time to start is at the beginning. That will have a much larger effect on interest savings.
 
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Too40gawlf

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Isn't the interest on an auto loan loaded up on the front end of the deal? He isn't saving money on interest payments like you would on a mortgage.

Thats what I thought initially, but it doesnt make sense that would allow payment of the principal separately if that was the case.

I didnt care much regarding early payment, interest, when I got the loan, because it was like 3.8% and it would be somewhere around $3.5K over the course of 60 months - so it wasnt a super huge amount.

But over the course of the last year, i've gotten to wondering.
 

Mach1USMC

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Yes. One way you're getting ahead on payments over time, the other you're saving money on interest.

Exactly- but, if you don't tell them the extra money is a principle only payment the bank won't apply it towards the principle.

OP- By making principle only payments on the front end of the loan you are reducing the amount of interest that can be charged because the principle itself has been reduced. It's really not that complicated
 
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