Why is my interest higher after paying down my principal?

I have been making large additional principal payments on my car loans every month. My loan balance has dropped by $3,000 in the last three months, but my interest charge is even higher than it used to be. Why is my interest rate so high even after I’ve paid down the principal?

When it comes to car loans, paying off the principal is a great way to reduce your interest and save on overall loan-related expenses. That said, certain agreements include language that makes it difficult to reduce your interest rate.
When it comes to figuring something out on your loan, it’s always best to contact your lender and learn the specifics of your situation. That said, here are the two most common reasons your interest rate won’t decrease after paying down the principal:
  • Your contract includes prepayment penalties: Prepayment penalties are fees that lenders use to dissuade borrowers from paying off their loans early. They essentially make up for the money lenders will likely lose if the borrower pays off their loan before paying all their interest. It’s possible that your recent payments triggered those penalties and that your interest includes those fees.
  • You signed for a Variable Rate Loan: Though rare for lenders or dealers to sign, a variable rate loan means your interest rate is liable to change as standard interest rates across the US change. If the interest rate has gone up in the past few months, it could explain your increased interest.
Hopefully, the above reasons can help explain why your interest rate isn’t reducing after paying off so much of the principal. But if you still don’t understand what’s going on, call your lender and ask. At the end of the day, your lender is the best-qualified person to answer your question.
If your loan’s rates and terms are unreasonable, try refinancing with Jerry. On average, car owners pay $85 less every month by refinancing their auto loan. And Jerry makes refinancing easy by finding you the best lenders at the best rates—so you can avoid the hassle of searching for lenders yourself.
Joshua Levy
Answered on Dec 22, 2021

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