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Paying the Principal

It was recently brought to my attention that in the case of controlled debt payments, like for a car or a mortgage, anything that is paid over the required periodic amount goes directly toward paying off the principal loan amount. Being largely oblivious of things that matter in modern society, I didn't know this until I was informed of it by my friend Matt a few days ago.

Now, since I got my car in 2004, I haven't made a single payment that was the minimum. I don't like opening mail to see what the actual amount due is. I was told at signing that the monthly payment would be a little over $409. Not one to strictly pay attention to the actual amount due, I just got accustomed to paying $410 every month. Some months, when unexpected expenses would pop up, I would put off the payment until the following month, when I would pay $825 or $850 instead.

I've been doing that a lot lately, what with having relatively major expenses to deal with, what with my recent status as a homeowner. But in so doing, I have apparently reduced the amount I have to pay overall. In the reminder mails that I periodically get from the lienholder, the monthly amount due has steadily decreased. Right now, the amount due is about $350 per month, but since I found out that any amount of overpayment just goes directly to paying off the principal balance, I've set up my ledger to say that any payments from now on will be at least $500, in an attempt to get the car paid off early.

It's with this in mind that I'm keen to make extra payments against the mortgage, as the amount for which I am in debt is many many times what I still owe on the car. Using an online amortization calendar, I found that with my current mortgage, I can pay it off six years early, simply by throwing an extra hundred dollars at it, per month. I am just about at the end of my tenure of paying off credit cards, a pursuit that currently occupies many hundreds of dollars in my budget. It has occurred to me that as these payments come out of existence, I could simply reallocate that money toward the payoff of the car, and then the mortgage.

Anyway, I figured now is as good a time as any to tell you about the ledger program I wrote, and have been using now for a couple of years. It didn't occur to me until relatively recently that some other people might actually find some use for it. I find it a much more accurate picture of how much money I have at any given time. A mild explanation of what it can do is on the Useless Crap page.

2:45 PM, May 17, 2007

6 comments

ck interjected:

Were you charged any fees bc you skipped a month of car payments? How much did your overall balance increase due to interest that accrued during the month you didn't make your car payment? Further discussion - http://www.consumerist.com/consumer/lending/volkswagen-why-not-skip-a-payment-217946.php

3:38 PM, May 17, 2007

bahua was sure you'd want to know:

As a matter of course, I pay my car payment almost a month early, so when the two-month payment was remitted, it was always received in time to avoid penalties. That has worked out well.

4:28 PM, May 17, 2007

TEEN took the time to say:

BORING

10:49 PM, May 17, 2007

Brian responded:

For pretty much any loan payment (student loans work differently sometimes), the first dollars of each payment go towards accrued interest. Interest accrues every day, so there's always interest to pay off. Anything else, of course, go straight to the principal. Usually loan payment schedules are designed so that you're paying just a little over the accrued interest at first, so you're barely attacking the principal early in the payoff. You pay just enough so that they get all that interest payment. Paying more is usually a very wise financial decision, because you get quite the bang/buck ratio on your overpayment dollars.

Mortgages can be different, or so I hear. I've heard of mortgages where you are penalized for overpaying. They want you to pay the minimum and no more, thank you very much. Before you start overpaying your mortgage, be sure you don't have one of those. Otherwise, dump the money on, as you see fit. :)

9:33 AM, May 18, 2007

Jeff offered:

Brian is right--check on that before paying more.

If that's the case, just dump more in to your 401(k), IRA, brewery or whatever.

10:48 AM, May 18, 2007

bahua had this to say:

I talked to the dude at the bank. All is well, and I can downpay all I want.

3:31 PM, May 18, 2007

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