How is a payoff quote calculator
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
