Why does my car loan interest go up despite making payments on-time?
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. The interest probably accrues daily, regardless of whether your payments are on time.
Here is another way to look at it. Does this debt enable you to buy more car than you can really afford, or more car than you need? If so, it's bad debt. Let's say you don't have the price of a new car, but you can buy a used car with the cash you have. You will have to repair the car occasionally, but this is generally a lot less than the payments on a new car. The value of your time may make sitting around waiting while your car is repaired very expensive (if, like me, you can earn money in fine grained amounts anywhere between 0 and 80 hours a week, and you don't get paid when you're at the mechanic's) in which case it's possible to argue that buying the new car saves you money overall. Debt incurred to save money overall can be good: compare your interest payments to the money you save. If you're ahead, great - and the fun or joy or showoff potential of your new car is simply gravy. Now let's say you can afford a $10,000 car cash - there are new cars out there at this price - but you want a $30,000 car and you can afford the payments on it. If there was no such thing as borrowing you wouldn't be able to get the larger/flashier car, and some people suggest that this is bad debt because it is helping you to waste your money. You may be getting some benefit (such as being able to get to a job that's not served by public transit, or being able to buy a cheaper house that is further from your job, or saving time every day) from the first $10,000 of expense, but the remaining $20,000 is purely for fun or for showing off and shouldn't be spent.  Certainly not by getting into debt. Well, that's a philosophical position, and it's one that may well lead to a secure retirement. Think about that and you may decide not to borrow and to buy the cheaper car. Finally, let's say the cash you have on hand is enough to pay for the car you want, and you're just trying to decide whether you should take their cheap loan or not. Generally, if you don't take the cheap loan you can push the price down. So before you decide that you can earn more interest elsewhere than you're paying here, make sure you're not paying $500 more for the car than you need to. Since your loan is from a bank rather than the car dealership, this may not apply. In addition to the money your cash could earn, consider also liquidity. If you need to repair something on your house, or deal with other emergency expenditures, and your money is all locked up in your car, you may have to borrow at a much higher rate (as much as 20% if you go to credit cards and can't get it paid off the same month) which will wipe out all this careful math about how you should just buy the car and not pay that 1.5% interest. More important than whether you borrow or not is not buying too much car. If the loan is letting you talk yourself into the more expensive car, I'd say it's a bad thing. Otherwise, it probably isn't. maybe everyone who has responded needs to look closer at the income base repayment plan for student loans. What this means is he payment does not even cover his interest rate so each month he makes his payment the loan grows, does not decrease. This is not a simple interest loan which is irritating because car dealerships do not even use a non-simple interest loan any longer. So, well your suggestions are well intended what is your suggestion now knowing that his monthly payments is not reducing his loan but actually his loan is growing exponentially each month. I also like the comment where the average student loan is $30,000, I would like to know in what state that is. That may work for a community college or a student who is reliant on parents to supplement their income so they can go to classes, however for someone who is working and going to school that person must opt out for night classes and online classes which definitely increases the cost of your classes. Right now the cost per credit hour is in the $550- 585 range. "There are other good answers to the general point that the essence of what you're describing exists already, but I'd like to point out a separate flaw in your logic: Why add more complications so that ""should I call this principal or interest"" actually makes a difference? Why's the point (incentive) for this? The incentive is that using excess payments to credit payments due in the future rather than applying it to outstanding principal is more lucrative for the lender. Since it's more lucrative and there's no law against it most (all) lenders use it as the default setting." Well typically you're borrowing a shit ton of money for 30 years so yeah you're paying a lot in interest over that period.   But your situation sounds especially bad, that's over a 10% constant assuming 80% LTV. What are you being quoted, like &gt;9% interest? I had a car loan through GMAC and extra money was applied to future payments.   At one point, I received a statement telling me I had 15 months until my next payment was due because I had not marked extra payments as going to principal. "they apply it to my next payment That's what my bank did with my auto loan.  I got so far ahead that once I was able to skip a payment and use the money I would have sent the bank that month for something else.  Still, though, I kept on paying extra, and eventually it was paid off faster than ""normal"". EDIT:  what does your loan agreement say is supposed to happen to extra payments?" "In addition to all the points made in other answers, in some jurisdictions (including the UK where I live) the consumer credit laws require the lender to allow the borrower to pay off the loan at any time. If the lender charges interest and the borrower pays off the loan early then the lender loses the interest that would have been paid during the rest of the loan period. However if the actual interest is baked into the sale price of an item and the loan to pay for it is nominally ""0%"" then the borrower still pays all the interest even if they pay off the loan immediately. If you think this game is being played then you can ask for a ""cash discount"" (or similar wording: I once had problems with a car salesman who thought I meant a suitcase full of used £20s), meaning you want to avoid paying the interest as you are not taking a loan." Depending on who you have the loan through and how they figure the interest charges (whether daily, monthly, bi-monthly, etc. normally monthly I would assume), your interest is probably figured either daily or once a month.   Let's assume that it is figured daily, otherwise it wouldn't make sense to make bi-weekly payments.   At 4% Annual Interest on a $150,000 home loan the interested added each day is about $16.44, but it doesn't stop there because it is compounding interest daily so the next day it becomes 4% of 150,0016.44 (which is negligibly larger amount) and they will tack on another $16.44. So what will happen is that the amount of interest you owe grows rather quickly, especially if you miss a monthly payment.  Everyone knows that the faster you pay something off the less interest you pay, but not everyone knows the formula for compounding interest.  a quick Google search rendered this site with a simple explanation Compound Interest Formula  unfortunately this formula doesn't take into account the payments being made. The big thing with making your payments bi-weekly rather than a bigger payment once a month is that you pay off some of that principle right away and it won't collect interest for 14 more days. if the interest is only calculated once a month, make your full payment before the interest is calculated, the same goes for your credit cards. Just call your credit union and ask if they will let you refinance at the lower rate. If they won't, then just increase your payment every month so that your car is paid off early (in 36 months instead of 60). You won't get the lower rate, but since your loan will be paid early, you'll be saving interest anyway. "The real answer is to talk to the bank. In the case of the last car loan I got, the answer is ""no"". When I asked them about rates, they gave me a printed sheet that listed the loan rates they offered based on how old the car was, period. I forget the exact numbers but it was like: New car: 4%, 1 year old: 4.5%, 2-3 years old 5%, etc.  I suspect that at most banks these days, it's not up to the loan officer to come up with what he considers reasonable terms for a loan based on whatever factors you may bring up and he agrees are relevant. The bank is going to have a set policy, under these conditions, this is the rate, and that's what you get. So if the bank includes the size of the down payment in their calculations, then yes, it will be relevant. If they don't, than it won't. The thing to do would be to ask your bank. If you're only borrowing $2000, and you've managed to save up $11,000, I'd guess you can pay off the $2,000 pretty quickly. So as Keshlam says, the interest rate probably isn't all that important. If you can pay it off in a year, then the difference between 5% and 1% is only $80. If you're buying a $13,000 car, I can't imagine you're going to agonize over $80. BTW I've bought two cars in the last few years with about half the cost in cash and putting the rest on my credit card. (One for me and one for my daughter.) Then I paid off the credit card in a couple of months. Sure, the interest rate on a credit card is much higher than a car loan, but as it was only for a few months, it made very little real difference, and it took zero effort to arrange the loan and gave me total flexibility in the repayment schedule. Credit card companies often offer convenience checks where you pay like 3% or so transaction fee and then 0% interest for a year or more, so it would just cost the 3% up front fee." "Patience has never been my strong suit Unfortunately this is what you need to build up credit. The activities that increase your credit score are paying your bills on time and not using too much of the available credit that you do have. The rest (age of accounts, recent pulls, etc.) are short-term indicators that indicate changes in behavior that will make lenders pause and understand what the reasons behind the events are. Also keep in mind that your credit score shouldn't run your life.  It should be a passive indicator of your financial habits - not something that you actively manipulate.   Is there anything I can do to raise my score without having to take out a loan with interest? Pay your bills on time, and don't take out more credit than you need.  You're already in the ""excellent"" category, so there's no reason to panic or try to manipulate it.  Even if you temporarily dip below, if you need to make a big purchase (house), your loan-to-value and debt/income ratio will be much bigger factors in what interest rate you can get.  As far as the BofA card goes, if you don't need it, cancel it.  It might cause a temporary dip in your credit, but it will go away quickly, and you're better off not having credit cards that you don't need." "I'm going to give a simpler answer than some of the others, although somewhat more limited: the complicated loan parameters you describe benefit the lender.  I'll focus on this part of your question: You should be able to pay back whenever; what's the point of an arbitrary timeline? Here ""you"" refers to the borrower.  Sure, yes, it would be great for the borrower to be able to do whatever they want whenever they want, increasing or decreasing the loan balance by paying or not paying arbitrary amounts at their whim.  But it doesn't benefit the lender to let the borrower do this.  Adding various kinds of restrictions and extra conditions to the loan reduces the lender's uncertainty about when they'll be receiving money, and also gives them a greater range of legal recourse to get it sooner (since they can pursue the borrower right away if they violate any of the conditions, rather than having the wait until they die without having paid their debt). Then you say: And if you want, you can set a legal deadline. But the mere deadline in the contract doesn't affect how much interest is paid—the interest is only affected by how much money is borrowed and how long has passed. I think in many cases that is in fact how it works, or at least it is more how it works than you seem to think.  For instance, you can take out a 30-year loan but pay it off in less than 30 years, and the amount you pay will be less if you pay it off sooner.  However, in some cases the lender will charge you a penalty for doing so.  The reason is the same as above: if you pay off the loan sooner, you are paying less interest, which is worse for the lender.  Again, it would be nice for the borrower if they could just pay it off sooner with no penalty, but the lender has no reason to let them do so. I think there are in fact other explanations for these more complicated loan terms that do benefit the borrower.  For instance, an amortization schedule with clearly defined monthly payments and proportions going to interest and principal also reduces the borrower's uncertainty, and makes them less likely to do risky things like skip lots of payments intending to make it up later.  It gives them a clear number to budget from.  But even aside from all that, I think the clearest answer to your question is what I said above: in general, it benefits the lender to attach conditions and parameters to loans in order to have many opportunities to penalize the borrower for making it hard for the lender to predict their cash flow." "You won't be able to sell the car with a lien outstanding on it, and whoever the lender is, they're almost certain to have a lien on the car.  You would have to pay the car off first and obtain a clear title, then you could sell it. When you took out the loan, did you not receive a copy of the finance contract?  I can't imagine you would have taken on a loan without signing paperwork and receiving your own copy at the time.   If the company you're dealing with is the lender, they are obligated by law to furnish you with a copy of the finance contract (all part of ""truth in lending"" laws) upon request.  It sounds to me like they know they're charging you an illegally high (called ""usury"") interest rate, and if you have a copy of the contract then you would have proof of it.  They'll do everything they can to prevent you from obtaining it, unless you have some help. I would start by filing a complaint with the Better Business Bureau, because if they want to keep their reputation intact then they'll have to respond to your complaint.   I would also contact the state consumer protection bureau (and/or the attorney general's office) in your state and ask them to look into the matter, and I would see if there are any local consumer watchdogs (local television stations are a good source for this) who can contact the lender on your behalf.  Knowing they have so many people looking into this could bring enough pressure for them to give you what you're asking for and be more cooperative with you. As has been pointed out, keep a good, detailed written record of all your contacts with the lender and, as also pointed out, start limiting your contacts to written letters (certified, return receipt requested) so that you have documentation of your efforts. Companies like this succeed only because they prey on the fact many people either don't know their rights or are too intimidated to assert them.  Don't let these guys bully you, and don't take ""no"" for an answer until you get what you're after. Another option might be to talk to a credit union or a bank (if you have decent credit) about taking out a loan with them to pay off the car so you can get this finance company out of your life." There is a reason - your credit score. If you ever take out a mortgage, you might pay dearly for your behavior. The bank where you have the credit card reports the amount on the bill to the credit rating agencies. If you pay before the bill date, they will always report zero. You should wait at least till the day after the billing cycle ends, and then pay off (you don't need to have the paper bill in your hands - you can see online when the cycle closed). Depending on your other financial behavior, this will have between zero and significant effect, on the percentages you get offered for car loans, mortgages, etc. I think this has to do with the fact that the interest is charged to your balance and grows everyday. As a result, the computer broke it down so that it can capitalize on that remaining balance. If your regular student loan payment was $500 a month at 5% interest, but your balance became $499, spreading out the $499, they can make more money off you. It might not be a lot, or in your case essentially 0, but it could be better than nothing.