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Auto Loan balance is including interest payment too

Nimka

I set up a loan account start date (3/11/2021), original balance ($40,500), interest rate (1.99 %), term (60 months), compounding (DAILY), payment schedule (MONTHLY), monthly payment ($710.27) etc

There are 2 problems:

Problem 1:
My actual Monthly Payment 710.27 = 610.92 (principal) + 99.35(Interest)

But when I open "Monthly Payment" using 'edit' it instead shows:
710.27 = 644.56(principal) + 65.17(interest) + 0.54 (Extra principal paid monthly)
I am not able to correct these figures.

Problem 2:
I manually added a split transaction on 4/25/2021 for total amount 710.27 like this:
610.92 (Auto Loan: Principal)
99.35 (Auto Loan: Interest)

In the loan register, the balance should reduce by only the principal of the split transaction, i.e., it should show (40,500 - 610.92 = 39,899.08)

but instead it is reducing the balance by 710.27 so shows (40,500-710.27 = 39,789.73)

How do I correct these problems?

Thanks in advance

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UKR

You have activated this loan account for transaction downloading.

For whatever it's worth ... I would not bother attempting to activate any loan or mortgage account for downloading. (Not discussing LOC or HELOC accounts here)

An online-connected loan or mortgage account does NOT have a transaction register. All data shown in the account come from whatever information the bank downloads to you, not what is calculated when you record the payment transaction ... if this process works at all.

As a result of being connected, the scheduled payment transaction reminder cannot transfer the amount of principal paid into the (non existent) account register and must use a category, usually something like Loan:Principal, instead. The category seems to vary with the Loan Type you selected when creating the loan account in Quicken.

Effective with Quicken Windows 2018+
you can deactivate an online-connected loan account and regain full control over your transaction register. However, you should still review the Scheduled Reminder (or Memorized Payee List entry) associated with the monthly loan payments to ensure they now transfer Principal to the loan account register and not to a Category.

Quicken cannot accurately determine the exact amount of principal + interest due to a different calculation method used by the bank. That's why you'll always have principal + interest + a small amount of additional principal. And you will always have to adjust the payment transaction to exactly match the numbers shown on the bank's printed statement.

NotACPA

Further, an auto loan, even if you pay it monthly, is almost certainly a "Daily Interest" loan. Where the amortization split of the NEXT payment is in part dependent upon what exact day your lender posts the payment for THIS month.

Mortgage loans, on the other hand, are "Monthly Interest" loans. Where the amortization schedule can be calculated and printed in advance, unless you miss a payment or such.

Q's Loan Wizard only works correctly with Monthly Interest loans.

Call your lender to discuss/confirm this.

Nimka

"You have activated this loan account for transaction downloading."
No, online is not activated for the auto loan account.
I did these steps Tools>Add Account > Selected "Offline Account" Tab > Loan
and then filled the fields.

Should I have done something different?

"An online-connected loan or mortgage account does NOT have a transaction register. All data shown in the account come from whatever information the bank downloads to you, not what is calculated when you record the payment transaction ... if this process works at all."

I meant "Payment Details" tab for the loan account and not the register. "Payment Details" showed the opening balance of 40,500. Then I added a split transaction mentioned above.

Nimka

Is there another method to add an auto Loan account? If so, what is it? I have been using Quicken (and QuickBooks) for more than 20 years and well versed with it. This is the 1st time I needed auto loan account and I don't know why I have unable to do so.

@NotACPA
"Further, an auto loan, even if you pay it monthly, is almost certainly a "Daily Interest" loan. Where the amortization split of the NEXT payment is in part dependent upon what exact day your lender posts the payment for THIS month."

Did I put anything wrong in the account details mentioned before?

NotACPA

If all payments were EXACTLY on the 1st of the month, that amortized 1st payment should be $709.70 with Prin $642.54 and Int $67.16 ,,, ($40,500 * .0199 / 12 = $67.1625). And the fullly amortized total payment should be $709.70).

So, I'm curious as to how your lender calculated your amount of interest owed.

Maybe, they're using the "Rule of 72", or some other method that disadvantages the consumer.

I'm also curious as to how the interest portion can be the same every month, since you're paying down principal every month and thus there should be a bit less interest every month.

BTW, before I was recruited over to Audit, I managed several loan systems ... and I understand the amortization formulas quite well. Mortgage was, I believe, the very first application that I worked on.

Nimka

@NotACPA
I am aware of "rule of 72" about how long it would take someone to double their money but I don't know how loan companies use it. Tried searching on google about loans but haven't found any info as yet. Is is legal for loan companies to use it to their advantage? Shouldn't consumer be able to report the company?

Your calculations are right on what should have been my first principal and interest payment and quicken came up with the same amounts but first payment is due after 45 days which I think is the reason for higher interest portion in first payment.

I have solved my problems.

1. I let quicken store the split transaction with amount it calculated.
2. I was entering past 2 payments the wrong way manually. Instead of using "Enter Loan Payment" from the drop down, I was entering a split transaction so the loan balance was including both principal and interest in calculating the balance.
Once I used "Enter Loan Payment" and modified the principal and interest amount to the ones in my statement, the loan balance is right.

Thanks for all the help.

NotACPA

You couldn't find it because I mis-remembered the name. Google "Rule of 78" instead. Sorry about that.

In lending, the Rule of 78 has to do with front-loading the interest. Thus it wouldn't be amortized over the entire loan but rather you pay a higher percentage of the interest up from (I.e., NOT 1.99% / 12 of the outstanding balance). Over the entire period of such loan, you pay the same amount of interest as if it were amortized ... but if you payoff the loan early you would have paid extra interest.

I don't know if the Rule of 78 is still legal, or if it's legal in your state.

Norman F. Raphael

Why can't Quicken recognize a simple interest auto loan, and will that feature be added?

sgvlasto

Agreed Norman - I would think you could tell Quicken that when a payment is made it could compare the current balance of the Loan at the bank, see the reduction of the principal was less than the payment from the bank, and apply the difference of the payment and balance reduction to an interest paid category.

Chris_QPW

Norman F. Raphael said:

Why can't Quicken recognize a simple interest auto loan, and will that feature be added?

sgvlasto said:

Agreed Norman - I would think you could tell Quicken that when a payment is made it could compare the current balance of the Loan at the bank, see the reduction of the principal was less than the payment from the bank, and apply the difference of the payment and balance reduction to an interest paid category.

They might call it "simple" but when one of the most critical pieces of information isn't known, it isn't simple any more. The exact date used for the payment is needed. The posting date that is sent to Quicken might not be that date.

What's more the loan companies are very "creative", they create loans that don't do a simple interest calculation based on the payment date.

I definitely believe that if the Quicken developers created such a loan type there would be as many complaints about the numbers not being 100% correct as there would be the people that are happy with the results.