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Written by Arthur Vidro Arthur Vidro

My sister-in-law recently discovered the mortgage payment she and her husband fork over each month is not reducing their mortgage debt one iota. Their mortgage payments are being applied exclusively to interest payments on the loan. The loan balance has not been reduced.

Some mortgages are fixed-rate (the interest rate remains constant for the life of the loan); some are variable-rate (the interest rate will fluctuate depending on what the future cost of borrowing money becomes); and some are balloon-rate, which means your rate is fixed until a given date, and then it skyrockets.

Too many people only concern themselves with their rate at the moment and don’t worry about rates they might be contractually bound to pay down the road.

Some mortgage lenders will let you pay down your loan balance. It’s a simple matter of making an additional payment — in addition to your monthly payment, which is probably for interest — and earmarking it specifically for the loan balance.

This is best accompanied by writing “reduce loan balance” in the subject section of your check and accompanying it with a note spelling out your intention. And then following up to make sure your instructions were carried out.

If you borrowed from the local savings and loan or credit union, you can avoid confusion by paying down your loan in person.

Why pay down your loan balance? Because it results in your interest rate being applied subsequently to a smaller principal, meaning less money paid in interest over the life of the loan.

Some mortgages, though, are drawn up in language that prohibits you from paying down your balance until after all your interest is paid off. This is to the lender’s advantage, for it guarantees that the maximum amount of interest will be paid on your loan.

On a smaller scale, the same system applies to car loans.

Many dealerships make more money from the interest you pay them on a car loan than from selling you the car in the first place. That is why dealerships try very hard to make sure you take out your car loan from them, not from a third party.

They’ll tell you they offer the best possible rates; sometimes that’s true, sometimes it’s a lie.

Back in 1996, I bought a new car for the first time. After a salesperson and I had settled upon a car, I was directed to another office, where the chap in charge of paperwork sat. We finally reached the point of having to decide on a schedule of monthly car payments.

“How much would you like to pay?” he asked.

I thought for a moment and then replied, “What are the options?”

I was asking a simple enough question, I thought, but he did a double-take and leaned back with pleasure.

“You know,” he said, “that’s the first time I’ve ever been asked that. It’s refreshing.”

I asked, “How do other people respond when you ask them how much they’d like to pay?”

He told me they all pretty much tell him they want to pay “as little as possible” each month.

But paying as little as possible per month means it will take you many more months (perhaps years) to pay off the car. It will extend the lifetime of the loan. It will extend the timespan you will be in debt. And it will vastly increase the amount of interest you end up paying over the life of the loan.

I selected a four-year plan but paid it off in three. The plan allowed the borrower to make additional payments as often as desired, and by doing so, one could pay off the loan earlier than contractually called for and thus reduce the amount of total interest paid on the loan.

Not all auto loans allow you to do that. After all, the lender wants your money and as much of it as possible — which they maximize by having you pay as little as possible each month.

Arthur Vidro worked for a decade in the stock industry. Before and after, he wrote newspaper articles and edited a few books. He has served as treasurer of theater and library organizations. He’s been cautious with money ever since a dollar was worth a dollar.