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Paying Off Car Loan Early | Principal vs Extra Payment Explained

what's up my people thanks for tuning in

my name is dimon and if you already

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community today I'm gonna talk all about

principal payments versus monthly

payments and what should you do with

your extra cash so let's get to it

monthly payments as you may know is what

you're required to pay per the loan

agreement that you signed up for so if

you have a loan out there you already

know that you have to pay X number of

dollars each month for so many months

and that time you're going to get the

loan paid off now part of that payment

is going to be applied to the principal

which is the balance that you borrow and

the other part is going to be interest

and interest is the penalty you pay for

borrowing that money so your monthly

payment is going to be split over these

two things so what's the principal

payment a principal payment is something

you would send in in addition to your

monthly payments and what this is is a

payment that's designed to reduce the

principal balance that you owe and the

reason this is important is because

every time they go to calculate your

interest that's owed they're going to

calculate it off your balance at that

time so if you can send in an extra

payment to the principal and reduce it

now you're going to pay less and

interest because it's going to be

calculated off of the lower balance make

sense right so you can see monthly

payments is what you're required to pay

for your contracts and you can see by

making an extra monthly payment you're

actually paid up for the next month on

the other hand you have your principal

payments which is something that's done

in addition to the monthly payments and

what that's going to do is allow you to

lower the balance that you have which

means the principal is lower therefore

the interest that they calculate is

going to be lower saving you money and

accelerating your payoff so they both

have their place now to really see this

in action and really see the power

behind these options let's take a look

at an amateur's ation schedule but

before we do that I want to ask you a

question right now comment down below on

which one do you prefer

do you prefer to make extra payments and

be paid up or do you prefer to make

principal payments so that you can save

on the interest and save the amount of

money you're going to

that pan which one is your method right

now and stick around to the end because

I'll share what you might take on that

also I'll share with you exactly what I

did when I was getting out of debt and

what worked for me so let's take a look

at that schedule for this example we're

going to use a loan calculator available

at Bank recom we're gonna have two

people brought the same amount $40,000

over five years or 60 months at 4%

interest the monthly payment is going to

be 700 $36.66 and both of these people

decide to do the smart thing and get

this loan paid off as fast as possible

however they decide to go about it two

different ways on the left here we're

going to have mr. extra and on the right

we want to have Miss principal and both

of these people decide they're gonna

send in double the monthly payments

because they want to get the loan paid

off fast but mr. extra decides he's

gonna send a man's extra payments

whereas Miss principal in size she's

going to send an extra payment in as a

principal only payment so let's dive

into the amortization schedule to see

how this affects not only their payoff

date but also how much interest they pay

at the end let's take a look at the

first payment in May they send in a

payment of one thousand four hundred

seventy three dollars and 32 cents now

since Miss principal applied the extra

as a principal payment the amount

applied to her principal was one

thousand three hundred thirty nine

dollars and ninety nine cents whereas

mr. extra didn't do that and sent it in

that's just a extra monthly payment so

he only has six hundred and three

dollars and 33 cents supply so you can

see the difference in their balance just

off the first month thirty nine thousand

three hundred ninety six dollars

compared to thirty eight thousand six

hundred and sixty dollars now what you

might be saying is what happened to that

extra money that you say well it's

simple when you send money into the bank

as an extra payment and not principal

what happens is they say well thank you

mister extra I appreciate you paying

your bill ahead now you don't have to

worry about sending us a payment into

your life it doesn't matter if you send

in an extra payment every single month

they'll just keep pushing your next

payment due date out further and further

and further whereas when you make a

principal payment every time you make a

principal payment they'll apply that

extra amount towards the principal

further than reducing your balance which

is reducing the amount of interest that

you owe however

since that extra amount is only applied

to the principle that next month you

still have your required monthly payment

that's due don't believe me check this

out thanks are good at what they do and

that's making money they're not gonna do

you any favors let me show you a real

world example from our personal truck

loan that I paid off last year as you

can see my original loan balance was a

little over $40,000 at the time of the

snapshot which was about a month and a

half before I paid it off my balance at

that time was just over seven thousand

nine hundred dollars but where do I want

you to focus in on is down at the bottom

where it says the payoff date was June

of 2023 and the remaining payments was

fifty two payments you see that's the

original payoff date and that's how many

payments I had left based off the

original contracts but at this point I

have made a ton of principal only

payments so my balance was way down so

why are they still showing that our 52

more payments they do this because they

want you to make the regular payments

they're not a fan of you making these

principal payments knocking down the

balance they want you to make your

regular payments so that they can take

their piece of the interest out of each

and every payment that you send in so

this is why understanding these things

is important because knowledge is power

now let's jump back on the computer okay

so I think you're starting to see the

power of principal payments but let's

dive in a little deeper let's go one

year in so now they've both been using

their strategy for one year and they

both been sending in double with the

monthly payments now May of 2021 what I

want you to pay attention to is Miss

principal has been sending in double her

monthly payments marking the extra as a

principal only payment and looked at her

balance just one year in from $40,000

down to twenty two thousand two hundred

twenty seven dollars and forty seven

cents now mister extra it's missing in

his double payments as well pushing his

due date further and further out now pay

attention to his balance thirty one

thousand nine hundred ninety seven

dollars and ninety four cents in just

one year miss principal her balance is

nine thousand seven hundred and seventy

dollars and forty seven cents cheaper

than mr. principal

because she's been making extra

principal payments reducing their

balance

reducing the amount of interest that she

pays now now let's zoom down to the end

and see how this looks in the end you

can see the her payoff date is September

of 2022 and she paid a total of 1997

dollars and 61 cents an interest now I'm

here Sean mister extras payoff date is

April of 2025 and he paid four thousand

one hundred ninety nine dollars and

sixty-five cents however even though his

payoff date is still 2025 he's done

paying his loan off in November of

twenty twenty two because remember the

loan was sixty months and he sent in two

payments every month so in 30 months he

sent in enough payments to cover his

loan but he sent in a total of forty

four thousand one hundred ninety nine

dollars and sixty five cents

meanwhile Miss principal only paid forty

one thousand nine hundred ninety seven

dollars and 61 cents so not only did

Miss principal pay her loan off in 27

months which is three months faster than

mr. extra she saved two thousand two

hundred and two dollars and four cents

in interest and that's the power of

principal payments now show me that

you're starting to see the power of

principal payments by smashing that lock

button thank you so now you've seen both

of these payment methods in action you

have principal payments over here you

have extra payments over here now to

answer the question earlier which one do

I prefer personally I prefer principal

payments over extra monthly payments and

the reason is is when I was getting out

of debt I was trying to get out as fast

as I can

and if I could save money in the process

I mean count me in so principal payments

was the way to go for me and I really

saw the power of principal payments when

I was paying off my truck so they both

do have a place and I'm not saying one

is good and one is bad they're both good

because his money towards something that

you owe but making the principal payment

is just my preferred method and what I

would do for the extra payment because

some of you guys may be thinking you

know hey I'd rather make an extra

payment just so I have the comfort and

the safety of knowing that I'm covered

at least one month ahead or more so what

I would do is I would take at least one

month of

your payment and put it in your savings

account so that you have the cushion

knowing that if something happened you

can just reach over grab the money and

cover it with no problem and from that

point forward take any extra money you

get and put it towards the principal

because we're trying to get out of debt

and we don't want to pay our debts up we

want to get these things paid off so

that's my take on it hey I hope this

video is useful for you I hope it helps

you and if you know somebody who can use

this information don't hesitate to share

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this until next time I'm Diamond peace