Today I have been on the phone with the company in charge of my car loan. This month was the first month that I made a payment on the van, after looking online I couldn’t find what my principal balance was. No where on my statement or online did it state. Not only that, this company didn’t have what amount was going to principal and what was going to interest.
So I called the company up. And it turns out we are on a simple interest loan, meaning that interest is calculated daily. This might have been the case with the car as well, but I was pretty illiterate when it comes to loans back then. Still am if I am being honest with myself.
I always thought all loans were like the standard loan where interest was calculated monthly. Now that I look back at things, I bet almost all my loans ever were on a simple interest loan. Makes sense the loaners want to make all the money they are owed, right?
So after researching how exactly a simple interest loan works, this is what I came up with. You divide by 365. This converts it into a daily rate, you then multiple that by principal amount to obtain the interest due for each day.
This amount is recorded in a special accrual account, which increases everyday. No interest accrues on this account. When your payment is received, this account gets paid off first and what is left over is used to reduce the balance.
Where borrowers start hurting is if they make a late payment. A standard loan has a grace period within which borrowers can pay without penalty. On a standard interest loan, borrowers pay interest for every day they are late.
People who make extra payments actually do better with a standard loan as well. Most lenders will credit extra payments received within the first 20-25 days of the statement period against the balance at the end of the preceding month. So for instance, someone pays $1,000 extra on day 20, will save the interest on that $1,000 for 20 days. With this kind of loan the interest still accrues for those 20 days.
So I am basically at a lost what to do. I was thinking of using this coming month’s snowball to make an extra half payment in the middle of the month, then paying the other half on the due date. And afterwards work on a bi-monthly schedule. This will give me an extra payment a year. But from what I am reading this will not really help. The only thing that works better for me is if I make my monthly payments early. I really don’t know how I can do this, since the majority of our household income comes in the beginning of the month and this loan is due at the 7th of every month.
I could really use everyone’s help in understanding this. I am not even sure if what I just wrote up is 100% accurate, since it is just my interpretation of what I read. Remember I am loan illiterate. What would you all do?