Question about loan with VW credit

[Guest]

About 2 months ago, I bought a used car from VW - sale price was $12k, and put $2k down, financed over 5 years to keep payments as low as possible... but plan to pay it off as quick as I can afford.

 

So I received my first statement, monthly payment is $240 as agreed, I made a payment of $300. My next statement came in and the payment amount is again $240 (showing I made 1 payment previously, and had 59 more to go), I was expecting the payment to be lower based on the additional $60 principal payment being applied, this is what Honda does with my loan with them.

 

I checked the statement to verify that the payment was applied properly, and it was:

---------------------------------------------

Date: July 06, 2009

Principal Payment: $163.16

Interest: $76.33

Invoice sub total: $239.49

Date:

Principal Payment: $60.51

Invoice sub total: $60.51

Total: $300.00

---------------------------------------------

 

I'm an intelligent person, but I don't follow this logic. Are my additional principal payments going to come off the back of the loan so that VW isn't losing any interest on the deal?

 

My original plan was to try and pay the car off quickly to get rid of the monthly expense, and by paying more each month like I do with Honda, my loan payment would go down which would help if I had a bad month or two (I am self employed). But if my monthly payment isn't going to change, I'm re-thinking this idea.

 

Thoughts?

[mk_378]

Some companies reduce the required amount of the next payment after you pay extra, others don't. It is kind of a come-on to try and make you pay less, so you will end up paying more interest.

 

The extra money was applied to principal which is what you want. This means you will pay off the loan with fewer payments than scheduled. Also the interest portion of all future payments will be less than expected, also leading to an earlier payoff and a smaller total of payments.

[Guest]

Is there a financing term for that, whether minimum payments are reduced based on lower principal owed or remain the same? I'm not one to sign docs without reading them, and do not recall anything indicating the monthly payment would never drop. It's not the end of the world for me, I just didn't expect it.

[gj83]

Amortization?

 

I never expected my car payments to go down as I paid more towards the principle, I just expected to pay it off faster.

 

Pretty much they calculate the amount of interest that would be due for your principle for the balance of the loan and they add it in to your monthly payment. I think I read that in most states they can't front load all the interest, but someone else might know better.

 

So if each payment has $76 in interest added into it and you pay your car off 3 months early you save $76*3. If they front loaded (not sure the real term) the interest and you pay off 3 months early you probably didn't save too much in interest, but you did get it paid off faster.

 

The key is that it is not like a credit card where interest is calculated each month and the payment changes. It's installment, not revolving.

Edited August 6, 2009 by gj83

[MarvBear]

Your contract has a big FED REG Z BOX that tells you your APR, amount of payments, term etc.

 

If you pay extra, usually the contract has a clause that the lender may apply monies received in whatever manner they choose. If you pay extra, and want it to go towards the principle balance of the loan, then it would be wise to contact the lender and ask for their preferred method so you accomplish the goal you seek.

[michaeljohn]

With most installment loans, including mortgages and car loans, paying extra toward principal doesn't change the amount of the next month's payment. But, it will enable you to pay off the loan more quickly and to save some money in interest.

 

Your extra $60 payment was applied to the loan principal, as desired. You now owe the bank $60 less than you did before you made the payment.

 

Additionally, for next month's payment, your interest owed will be based on the new principal balance. For example, assume a 6% interest rate and a $10,000 principal balance AFTER you made your most recent payment. Next month, you will owe $10,000*.06/12=$50 interest. If you hadn't paid that extra $60, your interest would have been calculated based on a $10,060 balance: $10,060*.06/12=$50.30.

 

So, the combination of reducing the principal, which then reduces the amount of interest you pay, means that your loan will end sooner that you had originally planned.

[Guest]

Thanks for the replies, I think some misunderstood my question but that's ok. I do understand everything that was mentioned here, know the rates, know that the extra was applied to principal as it should be, the loan will be paid off sooner, etc.

 

My main question was if it was standard for the monthly payment to remain the same, despite having paid more towards principal. You answered that Marv, thank you.

 

On my current loan with Honda (and also on an ancient loan from Ford), the monthly payment is/was recalculated whenever I pay additional towards the principal. Maybe it's Honda that is against the norm here, but if I pay them $1k against my $300 monthly payment, the overage goes towards principal just like my scenario here with VW, except that they now recalculate and lower my monthly payment - effectively keeping me on the same loan term that I signed for but on a reduced payment.

 

It's all good. Thanks for the input.

[Imanevilpoptart]

I'm also financed with VW. I pay an exra $30+ per month so in Sept I have no payment as that is vacation month and I may need $$$ since dh is on commission.

 

It shows up as such:

 

Monthly Payment Due Jan $360

Monthly Payment Due Feb $330

Monthly Payment Due Mar $310

 

Is this what you mean? You're not getting that option? Yours is going direct to principal.

[Cashnow]

Log on to your online account with VW credit, You can than request a payoff quoute and you will see that your actual loan balance has been lowered by the extra payments you have made. They report it kinda strange but in the end it all adds up. I just paid of my VW credit loan a couple of months ago.

 

VW credit has been really good to work with, I had the loan before BK reaffirmed it and they actually removed my late payments and it kept reporting as current on my credit report. I used their "skip a payment and add to the end of the loan option" twice and they don't report that as lates or negative on the payment history either!

[Guest]

Cashnow - Yes, of course. I do realize it is going towards principal (as I noted some figures above), and of course it will be paid off sooner than otherwise. I just thought it was strange that my overall "amount due" wasn't changing as I paid down the principal. But granted, its a new loan and I haven't paid all that much towards principal anyways.

 

Glad to hear they are good to deal with though. Its my first VW and I absolutely love the car!