How interest works on a typical auto loan
Many auto loans are simple-interest loans. Interest is figured on the principal still owed, not on the amount originally borrowed. As the principal goes down, so does the interest.
The calculator uses a monthly version of this: balance times APR divided by 12. A $20,000 balance at 6% APR builds about $100 of interest in a month. Each payment covers that month’s interest first, and the rest goes to principal.
On a simple-interest loan, the total interest isn’t locked in on day one, even though a loan document may show an estimated total. The real total depends on how fast the balance actually comes down, which is the part extra payments change.
Early in the loan, the balance is at its highest, so a bigger slice of each payment goes to interest. Later, the interest slice shrinks and more of the same payment chips away at principal.
What an extra payment changes
In the calculator, any amount above the scheduled payment goes straight to principal. That lowers the balance, which lowers the interest the next month, and the month after that, and so on until the loan is gone.
The scheduled payment itself usually stays the same. What moves is the end date. Because less goes to interest each month, more of every regular payment reduces principal, and the final payment arrives sooner. Extra $100 of principal at 6% avoids about 50 cents of interest the first month, and that small saving repeats every month the money stays off the balance.
How a lender applies an extra payment can vary. Some apply it to principal right away. Others may count it as an early installment instead. The calculator assumes every extra dollar reduces principal.
Monthly extra, one-time lump, or both
A one-time lump cuts the principal all at once, so its interest savings start immediately. A monthly extra works more slowly at first, then builds as each month’s amount stacks on the last.
Dollar for dollar, money applied earlier saves more interest, because it stops interest sooner. Some people prefer a monthly extra because it fits a regular budget. Others use a one-time amount like a bonus or refund. The calculator accepts both at once so the combined effect shows up in one result. The lump sum calculator goes deeper on one-time amounts across several debts, and the extra payment calculator shows how different monthly amounts compare.
Loan terms that can change the picture
Some loan agreements include prepayment terms, such as a fee for paying off early. The agreement spells out whether any apply.
A smaller number of loans use precomputed interest, where the total interest is set when the loan starts. On those loans, paying early can save less than a simple-interest estimate shows.
The results are estimates. Real loans figure interest daily, and payment dates shift a little from month to month, so the actual payoff date and interest can differ slightly. For a car loan alongside cards and other debts, the debt payoff calculator shows all of them in one plan.