I started with a 72-month, $23,468 auto loan in March 2003. I've
paid $400 every month to the present date, although the required
payment is only $325 a month. I just found out that the extra money
is not going to principal, but it adds time until my next payment
is due, which the bank says is in August 2005. How will this help
me if I want to trade vehicles in two years? By then the bank will
say that I have 10 to 11 months of no payment, due to the fact that
I'm so far prepaid. Can this benefit me when I want to trade in
and how does that play into the financing of another vehicle at
that point? Advice needed. Thank you.
A 72-month car loan is a long one. You seem to have thought things
out to a point by making sure you could afford lower payments over
a longer period of time. It may be, however, that your lender thought
about it longer than you did and locked in a long stream of interest
payments to offset your thinking.
From what you have said, you have not reduced the
principal amount owed on the loan even though you are paying more
than the agreed-upon payment. The upshot of your efforts is that
you could skip a year's worth of payments and your lender would
not care, because he is still making the money he expected to on
this loan. What we have here is a failure to communicate!
When you pay more than is owed on a loan, it is always
best to communicate to the lender that you want the additional payment
amount to be applied toward the principal in order to save money
on the interest. For those of you who are particularly fastidious,
I suggest you send in two checks, one for the regular payment and
the other for the extra, clearly marked that it is to be applied
to principal. This can clarify your wishes beyond a doubt. Please
note, however, that your loan may have a prepayment clause that
prevents you from being able to reduce the interest paid. You will
have to examine your loan documents to determine if that is the
If there is no prepayment clause, ask the lender to
recalculate your payments thus far to apply the additional $75 per
month to the principal and put you back on the same payment schedule.
The lender may not choose to do this, as it will cost money, but
you can certainly redirect in writing that future payments be handled
that way (again assuming no prepayment clause in your original contract).
Nevertheless, when the time comes to trade your vehicle
in and finance another one, your timely overpayments should certainly
help you. You will have paid nearly a year longer on the vehicle
and the bottom line on your loan will be less than anticipated.
As you look for your new car, be sure to read all
of the fine print about prepayment options. Also, consider a shorter
loan period. The $75 leeway you have afforded yourself was smart
thinking, but it exposed you to carrying an upside-down debt for
a very long time. By reducing, but not eliminating, the $75 margin
of cushion and shortening the term of the loan, perhaps to 48 months,
you keep from being upside down in your loan for a shorter period
of time. This means you won't owe more on your vehicle than it is
worth, which often happens with longer auto loans.
Keep up the good work and good luck!
The Debt Adviser, Steve Bucci,
is the president of Consumer Credit Counseling Service of Southern
New England. Visit CCCS
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advice or click
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