I saw a video explaining that principle payments helps save money by paying less interest and paying off your loan faster but I’m still confused as to how.
In: 0
Because you pay a % of interest on the total value of the car.
Let’s say I bought a big wheel for $100. I only pay $1 a month at a 10% interest rate, which is $10. So I pay $1/month plus $10.
Next month, I’m paying 1% interest on $99, instead of $100 the next month so the interest is only $9.99 instead of $10 but still HIGH. At the end of 100 days, I’ve paid a LOT because I chose a long loan term. The longer you pay and the less your payments, the more you pay overall because of interest.
Now, if I got a $25 check from grandma for my birthday and pay it toward the PRINCIPAL, I will only owe $75. You have to specify that it’s for the principal or they will just cover $25 worth of payments, don’t forget that. So if I do that, I now only owe $1 and $7.50 instead of $9.99. I’ve just saved myself $25 worth of interest payments, aka a LOT of money.
Many car loans are in the 30% interest rate area.
I once had a car payment that was $75/month interest. Since, once I realized, I’ve paid off every car early by making principal payments of every spare dollar I got.
Latest Answers