32

In my first payment on 06-17-2016, the principal applied to my balance was $186.76 and the interest was $107.50. As I kept making the payment on-time, the second payment on 07-25-2016 was a bit of a shock to me as the principle went down to $93.97 and the interest went up to $200.29.

I thought as I kept making payments on-time, the applied interest should decrease every time and the applied principal should increase. Am I wrong?

This is how my loan payment history statement looks like:enter image description here

  • 17
    14% on a car loan is a pretty bad rate. Don't be surprised if the terms are rigged to be as bad as possible for you. – Loren Pechtel Sep 16 '16 at 2:00
  • Why is the second payment made 8 days late? – DJohnM Sep 16 '16 at 2:20
  • 8
    The due date for my payment is on the 28th of each month so i was not late on my payment. – Tenzin Sep 16 '16 at 2:25
  • 3
    This video by John Oliver might be helpful -- your loan seems similar! youtube.com/watch?v=4U2eDJnwz_s – rrauenza Sep 16 '16 at 21:33
59

Interest is calculated daily.

Doing the math:
Between 6-17 and 7-25 are 38 days, 200.29 / 38 = 5.27 interest per day.
Between 7-25 and 8-17 are 23 days. 120.02 / 23 = 5.22 interest per day.
The minimal difference is because the principal has already gone down a little bit.

So you should expect ~5.20 x number of days for the next interest number coming up; slowly decreasing as the remaining principal debt decreases.

Note that this is equivalent of an annual interest rate of over 20 %, which is beyond acceptable. In the current economy, this is ridiculously high. I recommend trying to get a refinancing with another provider; you should be able to get it for a third of that.

  • 2
    If he paid just 1 day after posting each month, would he save in the long run? – RockPaperLizard Sep 16 '16 at 4:04
  • 1
    no, the interest is the same, it just gets added to a different line. – Aganju Sep 16 '16 at 4:26
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    thanks, I looked up a few refinancing options and i found a good one. I should have thought about that. But anyway thanks again. – Tenzin Sep 16 '16 at 5:07
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    @RockPaperLizzard Yes, slightly, because he wouldn't be charged interest on the amount that was paid early. So if he had paid on July 18th instead of July 25th, he would have saved a week of interest on the $94 dollars that was applied towards the principal. It's not a huge amount, but it can add up if you always do it. – Kat Sep 16 '16 at 6:51
  • Funnily enough, this has an impact even if your payments are on the same day each month - 30 days hast September et cetera et cetera. I'm not sure why your car payment schedule isn't set like that, but if it were, the difference would be much less noticeable, and the payments much more consistent. – Zibbobz Sep 16 '16 at 13:05
18

The interest probably accrues daily, regardless of whether your payments are on time.

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