Tips on Buying Cars: overpayment, simple interest, loan balance

Question
hi..i bought a new car last year and am paying a note of 480 dollars a month. now, my question is, if i pay 500 a month, a 20 dollar overpayment, should i put on the check to pay towards principle or pay towards interest? thank you!!

Answer
James,

Thanks for your question.  To answer your question, by federal law your loan is what we call a simple interest loan.  What this means, is that your interest is calculated daily based on your loan balance.  By law if you pay any money over your normal monthly payment, it must be applied to principle not interest.  You do not need to tell them, they are to do it by law.  If you feel more comfortable, just simply put a note on the check that any over payment is to be applied to principle.

Hope this helps.

Thanks - JB