How is interest applied on an RV loan?

An RV loan is like any other loan, you pay interest on the outstanding balance. The bank doesn't really care what you spent the money on.

Yes simple interest applied to a declining principal balance is an amortizing loan.

Although generally mortgage interest will use 1/12 annual interest rate to calculate the monthly interest and give a 10 day grace period. This keeps the amortization schedule fixed.

Auto and RV loans often will count days between payments on a 365 day basis to calculate interest. So if you are perpetually 5 or 8 days late you will pay a bit more interest and have a slightly larger payment at the end. Some are like a mortgage.

Of course any payment beyond the grace period will really throw things off. Most consumer loans have no prepayment penalty so go ahead and pay some extra when times are good. Read your statement each month to fully understand your contract.

Grit dog wrote:
Huh, weird. Haven't taken a loan out on a rig in a while, but this came up recently on here and I said they were like car loans and mortgages and were amortized loans and like 10 people chimed in and said they were 100% simple interest, not amortized......

That's Because people don't know what the terms "simple interest" and "amortize" mean. That becomes readily apparent when you read some of these posts.

95jersey wrote:
Hmmm. While I do understand simple interest, there is a major difference on how a mortage works, compared to a simple interest curve. Under a 30 year mortgage, I would be paying something like 80% interest for say the 1st 10 years, meaning I paid little to no primary. While it is what it is on a house and we have little choice as we NEED a home loan. I certainly don't want to pay mostly interest the 1st 5 years of an RV loan like a house and still owe the majority of the principle.

I don't think you do understand how simple interest works.

Let's assume they calculate interest monthly (daily, weekly hourly...works the same just have to adjust for the length of time):

At the beginning of the month, they take the current balance and multiply it by the interest rate (again adjusted for the time period, so monthly would be roughly 1/12th the annual rate). This is the interest you pay for the month.

When you make a payment, they first put enough of the money to cover the interest and the remaining amount goes to paying off principal.

No trickery or evil intent, early in the loan, the principal is very high, so the monthly interest is also. At the end of the loan the principal is small so the monthly interest is also small. Towards the end, you effectively have a very small loan.

Mortgage, vehicle, person doesn't matter what type of loan, they all calculate similarly (interest rates are often different though).

The difference you see with a 30yr Mortgage vs a 10yr RV Loan is due to the length of the loan. To pay off the loan 3 times faster, the 10yr loan payment is larger so you pay off more principal each month, particularly early on.

With a 30yr mortgage, the principal paid on early payments can be very low as you have a very long time to pay off the principal. This is also why a handful of extra payments early in the loan can knock years off the loan.

PS: Mortgage payments often include escrow for insurance and other items which aren't really part of the loan, so you need to account for that as you would be paying that regardless of having a loan or not. Also, there are some minor variations in how the interest is calculated but usually not enough for the average consumer to care about the differnce

Huh, weird. Haven't taken a loan out on a rig in a while, but this came up recently on here and I said they were like car loans and mortgages and were amortized loans and like 10 people chimed in and said they were 100% simple interest, not amortized......

Our 10 yr RV loan has interest based on the amount of principle owed. It goes down each month.

If you take your balance times your interest rate divide by 365 days in the YR and multiple by how many days in the billing cycle that is the interest for the month you will know how much of your payment is interest and what goes on principle.

The formula I used to pay it off is to double the principal payment on every payment.

I use a similar formula but use a set amount, i.e. $50-$100 or whatever I can. Double payments will also help. Using this method my son paid off an 8 year student loan in 2.5 years (with a little help from mom and dad).

wildtoad wrote:
All loans work the same. Interest is calculated based on the remaining principle. This is why paying more than you have to each month is beneficial. The extra payment amount reduces the outstanding owed thus reducing the interest portion.

That was such a simpler way of explaining it! :)

All loans work the same. Interest is calculated based on the remaining principle. This is why paying more than you have to each month is beneficial. The extra payment amount reduces the outstanding owed thus reducing the interest portion.