Correct way to book a [auto] loan

[Dave Carrigan]

Nathan Cummings <natecmmg@vt.edu> writes:

>    credit the monthly payment of $235.84 from checking with it split this way
> 
> -----------------------------------------------------------
>     asset:   my_checking           | 235.84   |
> -----------------------------------------------------------
>   liability:  my_car_loan          |          | 222.22[22]
> -----------------------------------------------------------
>   expense:  my_car_loan_interest   |          | 13.61[778]
> -----------------------------------------------------------
> 
> now the numbers in the right column were obtained by dividing the
> principle ($8,000) and the interest ($490.24) both by the 36 month loan
> period. the rounding errors are only slightly unsettling because after
> the loan period is over, they should account for only $0.08 in total
> error (i assume that accountants handle this a little more gracefully
> than i did, but i am not an accountant). 

This is basically correct, but the one problem with this is that the
interest paid on the first payment is much different than the interest
paid on the last payment. This means that you won't have a true picture
of your liability over time. For a small car loan, the difference will
also be small, but for a large loan, the difference will be significant.

For example, my mortgage payment is around $2000. Of that, some goes to
property tax and mortgage insurance.  Of the remainder, $150 goes to the
principal, and a whopping $1600 goes to pay the interest. When I make
the last payment in 28 years, it will be reversed: $1740 will go to
principal, and $10 will go to interest.

If I used the straight averaging method for my mortgage, the remaining
principal would be grossly inaccurate until at least 25 years into the
mortgage. Since the remaining principal is used to calculate your actual
home equity, it is relatively important to get the amounts accurate.

The better way to do it is to calculate the interest you accumulated
over past month (interest = principal * interest_rate / 12). That
portion of your car payment goes to your interest expense, and the
remainder of your car payment goes to the car loan liability. I don't
think that this exactly mirrors what the bank does -- they probably
calculate daily interest, which means they get to extract a couple of
extra nickels and dimes out of you -- but it's still more accurate than
straight averaging.

-- 
Dave Carrigan (dave@rudedog.org)            | Yow! NOW do I get to blow out
UNIX-Apache-Perl-Linux-Firewalls-LDAP-C-DNS | the CANLDES??
Seattle, WA, USA                            | 
http://www.rudedog.org/                     |