# Simple interest car loan

Dear Dr. Don,
I recently found out that I have a simple interest, daily loan for my car. I have had the car for three years. I have been about 23 days late on my car payments for the last three months because of a job layoff. The lender told me today that only \$5 of my last month's payment went to principal and the rest went to interest. The payment was \$473.05. My question: Since I am back to work now, would it be a good idea to pay half a payment every two weeks to lower the amount charged for interest? Any other suggestions would be appreciated. -- Beccas Boxster

Dear Beccas,
With a simple daily interest loan, the part of the monthly payment that is allocated to interest depends on how many days it has been since your last payment. When you pay 23 days late, you have 53-54 days worth of interest to cover before any of the money goes toward paying down the loan balance.

Still, three years in on a car loan it's hard to imagine how all but \$5 of a \$473.05 payment went to interest. My best guess is that you're paying late penalties as well as additional interest, and that's what is hurting you in paying down your car loan.

Here's an easy way to estimate the interest expense from one payment to another:

Interest Amount = (number of days since last payment) x (loan balance) x (interest rate factor)

Where the interest rate factor is equal to the annual interest rate divided by the number of days in a year. For a 9 percent loan the interest rate factor is: (.09/365)=.000246575.
For Example: Interest Amount = 53 days x \$10,000 x .000246575 = \$130.68

Making a half-payment every two weeks will pay down the loan faster, but that's more because you'll be making the equivalent of 13 monthly payments a year than any interest savings within the monthly billing period. The table below shows that for my example there's less than a dollar savings between the two choices based on intra-month interest savings, and that's before you consider the cost of the extra stamp.

 Deciding Between Payment Schedules Loan balance Interest rate Interest rate factor \$10,000 9% 0.00024658 Option 1 Beginning balance Last payment Current payment Days since last payment Ending balance \$10,000 \$473.05 July 1 \$69.04 (Interest) July 29 28 \$404.01 (Principal) \$9,595.99 Option 2 Beginning balance Last payment Current payment Days Since Last payment Ending balance \$10,000 \$236.53 July 1 \$34.52 (Interest) July 15 14 \$202 (Principal) \$9,798 Option 3 Beginning balance Last payment Current payment Days since last payment Ending balance \$9,798.00 \$236.53 July 15 \$33.82 (Interest) July 29 14 \$202.70 (Principal) \$9,595.29

You need to review your loan documents to find out the late charges and penalties associated with your auto loan. Something is costing you a lot of money besides interest expense, and you need to understand what that is.

Refinancing the loan may be an option, but your late payments on the existing loan aren't going to help you when you go shopping for a new loan.

 -- Posted: Aug. 23, 2001

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