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?
- 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.