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How does my car loan work?

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  • 06-01-2009 3:39pm
    #1
    Chumpski
    Registered Users Posts: 741 ✭✭✭


    Hi,

    I have taken a loan out, my first one ever and am unsure of how it works. Basically i took X amount on loan from my credit union, say 10,000. The interest they stated was 6%. I choose to pay it back over 3 years. I thought it would be repaying the 10,000 plus 6% (600). 10600 in total i would be paying back or 295 euro per month.

    Whats actually happening is im paying a fixed amount each month, say 270 but what gets taken off the 10,000 i owe varies every month. Some months its 250, others 260, etc. Can someone explain this to me please? Why does it vary?


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    #2
    ntlbell
    Registered Users Posts: 16,288 ✭✭✭✭ntlbell


    over 3 years is it not more like 1100 even


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    #3
    Chumpski
    Registered Users Posts: 741 ✭✭✭Chumpski


    Its 6% per year so. How come the amount deducted off what i owes varies do you know? Thanks.


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    #4
    ntlbell
    Registered Users Posts: 16,288 ✭✭✭✭ntlbell


    maybe ring them and ask?


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    #5
    seamus
    Registered Users Posts: 68,317 ✭✭✭✭seamus


    They're probably front-loading it, i.e. making you pay back all of the interest first.

    If your compounded interest is 1,100, then the aim may be to have that paid back by teh end of year 2 instead of the end of year 3.

    What they may say is that every month you'll pay back a fixed % of the outstanding interest and the rest goes on the principle. So let's say you pay back 5% of the outstanding interest per month.

    So in month 1, you pay your €270, of which €55 is interest repayable.

    So €55 goes on interest and €215 goes on the principle.

    Loan outstanding then = €9,785
    Interest outstanding = €1,045

    In month 2 then, the interest repayable is €52.25, and €217.75 is paid back against the principle.

    Perhaps this is what you're seeing?


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    #6
    ntlbell
    Registered Users Posts: 16,288 ✭✭✭✭ntlbell


    would that not cause later payments to reduce?

    his seems to go up and down?


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    #7
    poker_pro
    Registered Users Posts: 10 ✭poker_pro


    I think it's much simpler than you think. Credit unions typically are much more basic than banks. They usually add their interest once a week eg on a monday. Some months have 5 mondays and some have 4. Months with 5 mondays will have more interest added than those with 4. Your loan is not front loaded. The outstanding balance will be reducing over time and this will also cause the interest to reduce...again the 4/5 mondays will apply. Also, CUs tend to have an interest rebate, usually around xmas, where they will refund you a percentage of the interest you have paid over the year...this refund could be in the order 10-15%.....


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