‘Is this not common sense?’: Woman shares trick for paying off a car loan

Unless you're lucky enough to own your vehicle outright, you're likely paying off a car loan. But do you know how much your monthly payment is going directly into your bank's pockets?

Your monthly car payment pays for two things every month—the principal (the actual amount you borrowed) and the interest the lender charges on the loan.

One way to lessen your accrued interest is by paying a little extra every month. However, what many people don't realize is that most lenders aren't likely to apply the full amount of an extra payment to the principal alone.

One TikToker is reaching out to her viewers to make them aware of that fact and tell them how to get around it. Angela (@anggrill) posted her financial primer to her account on Thursday. The video has since picked up over 609,000 views from folks looking for facts about their car loans.

To begin, Angela tells viewers that she's supposed to pay off her car loan over four years but intends to pay it off in under three.

"If you want to pay off your auto loan quicker like I am, just listen up," she says. "If you have a monthly payment, and I will tell you what mine is, it's $379 … they will bill you $379 every month … that includes interest."

"If I want to make a payment, I will do what's required. I will do the [$379] every single month," she says. "But when you want to make an extra payment, say for the month of May, make sure you do this and you do not mess it up."

"I have Bank of America. The only way I can make another payment [that month] that's only applied to principal is if I give them a call or if I go in with a checkbook," she claims. "If you're bringing in a checkbook, you will write out to them in the little subject line' principal only.' If you do not do this … they will put that extra money towards the month that's next."

Angela claims in the video that the first time she made an extra payment on her car loan, she did not realize until later that the amount of the "extra" payment was applied to her next month's payment—meaning that the amount serviced both interest and principal, rather than only the principal.

"Make sure that you are following these steps," she advises. "If you call them, you just tell them, 'Hey, I paid $400 in the month of May. I want that to be applied towards principal.'" She claims, "If you do not do that, they will just, like I said, apply that to next month['s interest and principal payment]."

"If you apply it towards principal only, [your monthly payment] will literally go down significantly, and then you're paying less interest in the long run," she claims.

@anggrill If you have an auto loan — this is for you!!!!! I wish i knew all of this information sooner but im thankful i know about it now!!!!! #autoloan #payingoffdebt ♬ original sound - Angela

Does this payment hack actually work?

Personal finance website Bankrate.com supports Angela's assertions that paying down your principal saves you money over time, depending on the type of loan you have.

"When you make extra payments on the principal, you save on your interest over time," the site says. "With a simple interest loan — which make up the vast majority of car loans — interest is a percentage of the principal you owe. As you pay down the principal amount, your accrued interest becomes less and less."

However, the site also states, "With precomputed interest loans, lenders front-load interest on your loan payments, so you benefit less from early payoff."

Bankrate also confirms that "many lenders will apply the extra payments to any interest accrued since your last payment and then apply anything left over to the principal amount. Other times, lenders may apply extra funds to next month's payment."

"It's like they don't want me to pay off early," TRUCKINGWITOCI (@truckymc8an) wrote in the video's comments.

Angela responded, "Unfortunately you're right :( banks want us to take as long as humanly possible to pay off our loans. But we just have to outsmart them!"

One viewer seemed perplexed by Angela's advice, asking, "Is this not common sense? How would the teller know that you want it for principal if you don't explicitly tell them or write it on your check?"

Angela contended, "Not common sense! You have to write it in the memo and double-check on the receipt that they give you to be sure it says 'principal only.'"

Another viewer added, "I was paying extra until I realized it wasn't going to the principal instead covering the following month's payment but I learned eventually:) thank you for sharing 4 others!"

The Daily Dot has reached out to Angela and Bank of America via email for more information.

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