Quote:
Originally Posted by Xaxas
You mean paying before the due date? I read somewhere sometime ago that it does, I'll let you know as I'm making the payments 5 days before due date, but it's been 10 days past due date without my statement.
If you mean if paying more reduces the amount of interest rather than paying the car faster, then it does, I'm pretty sure there is someone more experienced than I am that can give you an explanation that's not an overly gross simplification.
$1000 loan, $200 payment, $100 goes towards interest, $900 left and you get charged interest in this
$1000 loan, $200 payment + extra $50, $100 goes towards interest, $850 left and you get charged interest in this
Or something among those lines, either way, compounding interest is annoying, just playing the same amount split bi-weekly means you will pay less interest over the life of the loan.
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When you pay early, that [usually] does reduce your total amount of interest paid because the amount paid to principle reduces the principle amount earlier in the cycle. However, the way that some banks amortize your loan, what ultimately matters is the principle balance on a specific day of the month as opposed to compounding interest daily.
In your example, you are assuming that the extra $50 is paid toward principle. From your previous post, some lenders do not do this automatically and apply the money directly toward your "next payment" amount. Unless that money is directly credited to the principle amount, it very well may NOT reduce your overall interest liability as it will not slow down the rate of compounding.