“Why Would the Interest Portion of My Car Payment Fluctuate from Month to Month?”

I received this email last week:

Hi, I was wondering if you could help me out and explain why each month the amount of my car payment applied to interest goes up and down as opposed to gradually going down? Does the time of the month you make your payment affect this? Or something else?



After a couple of email exchanges, I got the following information:

Amount financed: $16,788
Interest rate: 12%
Term: 6 years (72 months)

I plugged those into a spreadsheet to find that his monthly payment should be around $328.21. He told me his actual payment is $331.99 per month. Most likely, there’s some program included in his monthly note. He also sent me a record of his payments:

As you can see, his first payment had a ton of interest. That’s most likely due to the fact that they probably put off the first car payment for 45 days (at least that’s what I came up with). My theory is that interest on this loan is charged on a daily basis. In this case, they divided 12% by 365 and then multiply that figure by the outstanding balance and add that amount to the balance. Like this:

Then, on the date the payment is made, the current balance is reduced by the amount of the payment and the interest charge is calculated on that balance. The interest portion of the payment is simply the sum of the daily interest charges since the last payment. So, if he goes longer between payments, there will be more interest for that particular month. I came pretty close to getting the same numbers as this reader sent me.

He then asked me if there was a way to reduce the interest charges by sending in his payments early. That will reduce his interest charges slightly but to REALLY make a difference, he needs to pay more towards his principal each month. That would give him the most benefit. And, since his interest rate is 12%, it would be very wise of him to do so. According to my numbers, he will end up paying over $6,900 in interest on this loan. He only financed $16,788.

The only good thing I can say is at least he bought a Honda. I just hate seeing people with these kinds of loans.

6 thoughts on ““Why Would the Interest Portion of My Car Payment Fluctuate from Month to Month?””

  1. To get the effective daily rate from an annual rate, you’d use the formula:

    (1 + annual_rate) ^ (1 / num_periods) -1

    equals: .000310538 daily interest rate.

    Most second mortgages (HELOCs, etc) and credit cards use daily interest. I did have one car loan like that too. Best bet for these types of loans is to pay often, and pay early. If the payment is not due for 2 weeks, but you have the money in hand now, send it off!

    My main mortgage does not use daily interest, so it makes no difference if I pay 2 weeks early, or 2 weeks late.

  2. My advice to him:
    +Pay this loan asap, unless you have credit cards or other debt with higher interest. Cut expenses and get it paid off!
    +Car loan interest is not tax deductible so the actual interest rate you are paying is more like 15% (depending on tax bracket).
    +This means, you are paying around 60% of your monthly payment – $180/month – to interest every month on a depreciating asset.

  3. Wouldn’t making a half payment twice a month (or better, every two weeks) help him out too?

  4. I have a similar load with the portion of my payment going to interest fluctuating widely each month. Is what Courtney suggested true?

  5. I’m having the same problem with the fluxuating interest rate..
    but im lost at the fact that i make my payments almost 2 weeks early, and my APR is below 4.5%. Isn’t that an awesome APR? i am so lost.. please help answer my question

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