This may be a long post, however your question can't really be answered well without going through some stuff.

Financing through the dealer isn't always a terrible thing. There wasn't a single local credit union which had a rate as competitive as Toyota Financial Services by the time I was done in the finance office at the dealer. Also the finance employee I was working with was not a total a** so that went very quickly, smoothly and he was knowledgeable and very low pressure. I asked direct questions about prepayment (principal) penalties and he gave me straight answers and pointed out the clause on the note. There were no prepayment penalties. In other words my dealer experience was more than satisfactory.

Anyway, I did finance through TFS. So far their customer service has been excellent and their online epay is convenient and allows me to make payments larger than the required payment flexibly, so from month to month I can increase my extra or decrease it as financial commitments change.

TFS loans are simple interest loans, meaning that interest is charged on a daily basis and is accrued until a payment reaches them. Interest can only be charged on the outstanding balance of the loan. In my case my minimum regular payment is about $287, however I have made monthly payments in excess of that since the first payment. So, interest is accrued from the last day of payment to the next day of payment. Since I use epay, my posting date is always the same each month. So, I'm charged 30 or 31 days of interest between payment dates. That daily interest amount is based upon the outstanding balance of my loan. So, when a payment is received, the accrued interest is taken from that payment and the remainder is applied to the principal. Since the principal balance is lower the new daily interest accrual amount is lower. That means when the next payment comes in less interest will be taken out of it and more will go to principal.

In this instance we are making payments monthly and as such the loan appears to be an amortized arrears loan where and amount of interest is calculated from the remaining principal balance for the entire month. However if you made 2 payments each month, about 15 days apart, for the regular payment amount, or a little better, the system would only take 15 days of accrued interest out of each payment received and the rest would go to principal. This has a pretty dramatic effect on your outstanding principal balance and it reduces your interest exposure very quickly.

So, any extra payment, either double payments each month, or a larger monthly payment, or even occasional balloon principal payments ($1000 or 2000 or more in one lump sum) will reduce your principal balance and thus the amount of interest they charge from that point forward reduces to reflect the lowered principal balance they have out in your vehicle.

TFS billing statements are a little strange in that every payment which is at least the minimum amount due will advance the due date. It is very easy to get loans with them "prepaid", however interest is not prepaid because they only charge interest from receipt of payment to payment. In fact a lender can only charge interest from payment to payment. They cannot charge a fixed amount of interest on the loan regardless of what you do to reduce your principal balance. There are examples of fixed interest like those stupid payday loan places, however banks can't do that and their computer systems do not do that. In other words, the bank can only make money on money that is not in their pocket, but in your car or home or whatever.

Also, if you make a payment greater than the regular payment with each payment the TFS statement for the next month will show the required payment as decreasing. Don't let that fool you. What they are doing is capitalizing the loan. Meaning that the extra principal has been credited to your principal balance, and your interest due is being calculated on that new lower principal balance, but the system reduces the next required payment because you are "off schedule". The system wants to get you "on schedule". Don't do that. Don't pay the minimum due. Let's say you are paying $50 more each month than the regular payment, and the regular payment is $200. Considering the interest costs, in about 5 months the system will advance your due date not once but twice with that 5th payment because the accrued principal contribution you have made over the past 5 months equals one regular payment. So, not only will the amount of the payment due fluctuate with an increased payment each month, the system will start advancing your due date at a faster pace than you are actually paying.

Do not let this alarm you or fool you. To pay off your loan early you must continue paying the payment you choose that is above and beyond the regular payment amount each month without fail even if the billing statement says you are not due for 2 or 3 months or the amount due is less than your minimum payment or less than the amount you are making that is above the contract minimum.

Paying off a loan early requires discipline and budgeting. You have to pay an amount of money each month above and beyond what is required to reduce your outstanding principal faster. As you reduce your principal, you reduce your interest exposure and as such you will pay less interest over the life of the loan than you would if you just paid the minimum payment. It is a winning situation for you, but you have to stick with it.

I'd be happy to clarify this post more. Please PM me if you still have questions or want further clarification. I'm happy to help.