Dear Driving for Dollars,
I bought a car six months ago and I just realized that I am paying more toward the interest than I am toward the principal. Why is this? Is there anything I can do to change it?
You must have a high interest rate on a smaller car loan. For example, if you have a $25,000 auto loan with a 15 percent interest rate for five years, you would be paying more in interest than toward your principal in the beginning of your loan period. As you progress in your loan, the amount paid in interest decreases, while the amount going toward your principal increases. To change your situation, you could look at refinancing your car loan at a lower interest rate, or start paying extra toward your principal each month if that’s allowed on your car loan.
To see exactly what’s happening in your situation, use Bankrate’s auto loan amortization schedule calculator; enter in your loan amount, the term, the interest rate and the start date, then click “Show/Recalculate Amortization Table” to see the breakdown between principal and interest in each payment. It’s quite likely that more of your payment will be allocated to the principal soon.
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