A portion of your car payment goes toward your loan's principal amount; the rest goes toward interest charges. Interest is figured on the loan's current balance, so the amount you pay toward interest changes as each monthly payment changes your balance. For this reason, you should aim to make payments toward the loan's principal amount to reduce your loan balance, not the interest.
Interest Charges
The amount of interest you pay with each car payment is highest when you first initiate your loan. To fully gauge overall interest and the amount of your monthly payment that goes toward it every month, use an online calculator or talk to your lender. The First Car Guide website offers a calculator that breaks down changing interest payments each month and the total amount you pay over time. Because the amount you pay toward interest changes monthly, paying toward the loan's principal can save you money in interest charges.
Early Payoff Penalty
Banks usually allow you to pay off your auto loan early. However, they may charge a penalty fee for doing so. Before you make any extra payments toward your loan amount, talk with your bank to find out if early payoff fees exist. Or you can review your bank contract, which also states applicable loan penalty fees. Banks may require that you keep your loan open for at least several months. If fees do exist for paying off your loan early, don't make extra payments unless you can significantly save on your interest charges.
Bank Contact
Don't just pay a higher car payment without speaking to your bank beforehand. Some banks apply the extra payment toward your next month's payment; others apply it toward interest. Talk with your bank about sending in the extra payment and how you should go about doing so. It's financially beneficial to apply the extra payment toward your principal amount; most banks require that you add a note or send an extra payment to accomplish this.
Another Option
If you feel your interest rate is high, consider refinancing your auto loan. If current interest rates are lower than yours, you can benefit from refinancing. You can save thousands of dollars with a lower rate and also decrease your payment. You can also shorten your loan term to pay off the loan faster. If your new rate is low enough, you may be able to shorten your term and pay the same monthly payment.
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