My Extra Payments towards my Auto Loan was not being applied to Principal!

//My Extra Payments towards my Auto Loan was not being applied to Principal!

My Extra Payments towards my Auto Loan was not being applied to Principal!

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It was a cold winter day in 2006.  I was 6 months out of law school working at a firm where I usually stayed till about 7pm.  I walked to my trusty, lovable Nissan 240sx.  This car had so many miles the odometer literally stopped working (I am not kidding it was stuck on 160k).  The hood was dented inward cause it was actually backed up on by a construction truck, and sometimes it didn’t exactly feel like shifting….but boy did I love this car.  It was my first car and it survived Senior Year of HS, College and Law school.  So imagine my disappointment when I walked to my car that day and it didn’t start.  I popped the hood (like I knew what I was looking for) but then I saw it, a large crack down the side of the engine.

It was over for my baby

I have previously discussed my eventual reasonable car purchase, but I learned something today about that purchase.  When I bought the car I received a 7 year loan at 13%.  As I fixed my credit, I refinanced it down to 9%, but kept my payments the same.  I was paying an extra payment of $15 bucks a month and I assumed those payments were going to principal.  Any time someone uses the word “assumed” you can assume (cheesy pun intended) that he done messed up.  Assuming anything was my first mistake!

Most Auto Loans are Amortized but Your Extra Payments may not be reducing Principal

Wikipedia defines an amortizing loan and amortization schedule as,

While a portion of every payment is applied towards both the interest and the principal balance of the loan, the exact amount applied to principal each time varies (with the remainder going to interest). An amortization schedule reveals the specific monetary amount put towards interest, as well as the specific amount put towards the principal balance, with each payment. Initially, a large portion of each payment is devoted to interest. As the loan matures, larger portions go towards paying down the principal.

Well, what was happening with my Wachovia Auto Loan?  Today I looked at my account for the first time in months (my second mistake), and my monthly payments were being reduced, so I quickly thought to myself, “Self, that isn’t supposed to be happening.  I am on an Amortization Schedule, as such any extra payments shouldn’t reduce my monthly payment, but rather it should reduce my principal of the last month of the loan.”  This is the whole idea of prepaying your mortgage – it is to shorten the time you are paying, and thus reducing the total interest you are paying to the lender.

Wachovia Wasn’t Reducing my Principal on my Auto Loan – They were speeding up the Interest on the Amortization Schedule

When I called the Wachovia Rep, who was very nice by the way, and told him what was going on – he explained to me that they deal with these phone calls often.

I said, “What Phone Call? When the borrower realizes that his extra payments are just paying Wachovia early, rather than reducing his principal faster?”  He laughed.  The Wachovia Representative explained that their Auto Loan Payment Program isn’t set up to apply extra payments to principal.  When I asked Why…he again, laughed.  The answer is simple they make more money the way it is being done.

While, I thought I had been doing everything right, like prepaying a debt, and having that payment paid automatically from checking account, I was wrong.  So learn from my money story – if you are prepaying any debt make sure your payments are being applied to principal and not just prepaying what the lender originally calculated as your total interest payments.

One Caveat: Just make sure the loan doesn’t have a prepayment penalty.

Want to Play with a Amortization Calculator?

By |2016-03-07T23:05:59+00:00August 11th, 2009|Debt|9 Comments

About the Author:

Evan is the owner of My Journey to Millions which was started to track his journey from a broke debt ridden law school graduate to building a positive balance. Need more Evan? Follow him on Twitter, Contact him or get new posts directly to your email


  1. Dave C. August 11, 2009 at 9:53 pm - Reply

    My Journey, thanks for sharing this. My fiance has been doing something similar to you, by making extra payments each month. I emailed this blog post to her, and hopefully we can check to see if a similar thing is occurring.

    • My Journey August 11, 2009 at 10:05 pm - Reply

      The hint will be if her payments are getting lowered. Also, tell her to request a new amortization table!

  2. FFB August 26, 2009 at 10:51 am - Reply

    I had a similar experience on my old car loan. Thought I was being smart by paying extra. Then, like you, I saw me next month’s payment was just lowered. Yup, I was paying any more to principal.

    I found out that if I wanted to pay principal I had to send the extra payment somewhere else or use a different online payment location. These were sneaky details on my bills which I didn’t take the time to read.

  3. Bobby September 1, 2009 at 4:20 pm - Reply

    My Journey,
    I think it is one of the banks can get a bad name. I had a mortgage I was doing the same thing with. I paid a bonus into the mortgage company they decided to apply the payment to the next two months payments. Within the same month I decided to take some savings and knock the entire loan out. I did this knowing the applied two payments in the future so left the amount of one month’s payment so I would not overpay. Those yahoos decided that I still hadn’t paid the loan completely while they held my future Interest and Principal payments even though it would pay the remaining $300 balance. I called them and let them know they were basically acting like a bank and needed to apply my future payments to my current balance and it would be closed and they could send me the remaining balance. Ended up they wanted me to send them the $300 even though they had two months payments sitting in accrual. After called again and let them know that they would just have to send me a larger check to make it right after the payment I conceded. They sent me a check for $12.00 and said that was the end. They kept payments for two months that hadn’t happened. They contest that they don’t owe anymore than the $12.00 UGH…wish I could find a Lawyer that would take the case based on principal. I would donate the money they owe me…

    • My Journey September 1, 2009 at 11:17 pm - Reply

      Sometimes it isn’t worth the fight!

  4. dana19962001 November 13, 2009 at 8:38 pm - Reply

    Also, if you use online amortization calculator to calculate your car loan monthly payment, you may paying more than you should.
    I recently find out my Honda auto loan is 3.966% instead 3.9% on my notes.So, I called, but I was told my interest rate is 3.9% and my loan payment amount is correct. but I have used 4 different online amortization calculator , they all show as 3.966%. when I explain this to the rep, they said they dont know what is going on and I asked them to forward my compaint to proper department and want they recalucate my loan payment, according to 3.9% on my notes, the rep refused. And I refinanced my loan today with the rate 3.45% with otherbank
    So, make sure your payment amount is what is should be, run serveral free online amortization calculators.

  5. Evan@MyJourneytoMillions November 17, 2009 at 1:52 pm - Reply

    Wow thats an interesting story…for .66% they lost a customer!

  6. Kristin November 22, 2012 at 2:25 pm - Reply

    Safe Credit Union in California does the same thing. I have always pre-paid any/all auto loans off (granted usually were thru the dealership i.e; Ford Motor Credit). This time I have a VW Jetta and had made a $1,000 extra payment – I told the teller “I want this to go towards principal” (as I had learned needed to be said from years earlier). Then I got a notice “No payment due for 4 months” – I went into the bank and was politely told “We don’t apply it to principal. This is how we do it.” Ridiculous. My loan is supposed to be for 3yrs. I plan on paying it off next month (7 months from the date of origination.) – OH and I always make sure no prepayment penalty. 🙂

  7. bob June 28, 2018 at 11:08 pm - Reply

    If you have a simple interest loan it doesn’t matter what you tell the teller. I noticed when paying my Chase car loan online, a box where you could put an amount to “apply to principal.” and another box to “apply to payment”

    This is a head scratcher because it simply does not matter if you say “Apply to principal” or not, the terms of the loan spell out how your payment is applied

    Think about it for a moment. Say your monthly payment is $200 and you pay $400. Say the interest for the month is $25.00 You have paid $25.00 in interest. Where does the remaining $375 go if it is “applied to payment”.

    Now, since I always pay extra and put the payment in the “apply to payment” box, my bank statement says my next payment is due in 3 years!!! If i were to take their advice and make no payments for 3 years, my loan amount would slowly but surely climb back up as the interest accrues, to what it was if I made the regular payment each month.

    So you see, on a simple interest loan, all they are doing when you pay extra, is giving you permission to skip some payments. They are hoping you will, so the interest will build up.

    Nevertheless the payments pay down your principal in the exact same amount regardless of whether you tell them to apply to principal or not.

    Now, if you have some sort of low grade loan due to bad credit, you might not be getting a simple interest loan. Maybe you get one with a pre payment penalty. Maybe you get a “pre computed” loan… Pre computed are crappy in that the amount of the interest owed is the same whether you pay ahead or not. When you pay off your loan, then some math is done to repay you any interest you may have made over what you should have . Precomputed loans are illegal in 17 states, and may not be more than 61 months even in the states they are legal.

    In any of these loans, it simply doesn’t matter how you tell the teller to apply the payment

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