The Impact of Making Extra Payments on an Auto Loan

Aug 9, 2015

Some people do not think about the benefit of paying extra on their auto loans on their vehicles purchased from car dealerships in El Paso. They simply figure they are stuck with the regular payment amount for the life of the loan. However, this is not the case. Much like a home mortgage, your car loan has an amortization schedule. This schedule is a breakdown of every monthly payment for the life of the loan and shows how much of the payment is applied toward interest and the loan principal balance. There are tools you can use to create your own amortization table, or ask your lender for a copy.

Initially, the amortization schedule will have a larger portion of the monthly payment being applied towards interest. As you continue to make monthly payments, the monthly interest amount starts declining, and the monthly principal amount starts increasing. Toward the end of the loan, the majority of the monthly payment is applied to the principal balance. By paying a little bit extra each month towards the principal balance, not only do you pay the car off sooner, but reduce the amount of interest paid back during the life of the loan.

For illustrative purposes, let’s assume you financed $20,000 for five year (60 months) at a 6% interest rate. The regular monthly payment would amount to $386.66, not counting any add-ons, like extended warranty coverage or service agreements. If you were to pay an extra $100 per month toward the principal balance, you would pay off your vehicle in 4 years (48 months). Where some people are misled is they calculate 60 months times the regular car payment and compare this amount to multiplying 48 months times $486.66, and then assume they are paying more during the 4 years instead of just paying the regular payment over 5 years.

What actually occurs is the principal amount decreases faster, which means the amount charged in interest also declines. If you were to look at an amortization schedule, you would discover the total amount paid in interest by just making your regular monthly payment over five years is $3,199.36, compared to $2,444,38 by paying the extra $100 per month for the life of the loan and paying it off a year early. A comparison of the monthly payment breakdown looks like this for the first 4 monthly payments:

Payment Number		Payment Amount	Principal	Interest	Total Interest	Balance
1		$386.66	$286.66	$100.00	$100.00	$19,713.34
2		$386.66	$288.09	$98.57	$198.57	$19,425.25
3		$386.66	$289.53	$97.13	$295.70	$19,135.72
4		$386.66	$290.98	$95.86	$391.56	$18,844.74

Paying an Extra $100 per Month:

Payment Number	Payment Amount		Principal	Interest	Total Interest	Balance
1	$486.66		$386.66	$100.00	$100.00	$19,613.34
2	$486.66		$388.59	$98.07	$198.07	$19,224.75
3	$486.66		$390.53	$96.12	$294.19	$18,834.22
4	$486.66		$392.48	$94.17	$388.36	$18,441.74

You can easily see the slight difference in the remaining balance

You can easily see the slight difference in the remaining balance and total interest paid. While it might not seem like much at the beginning of a car loan, over the life of the loan you end up saving $754.98 just by paying an extra $100 per month.

For further questions about auto financing, or assistance in applying for a new car loan, feel free to contact Integrity Kia at 915-856-2982, or stop by our El Paso showroom.