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Discussion Starter · #1 ·
Purchased my 2005 Prius in April. I'm not particularly good with money-related issues, and am wondering if I agreed to a bad deal. I put money down and financed the rest through the dealership. They told me that regardless of whether or not I make another sizable payment, the monthly payments will stay the same until the car is paid for.

Does this seem right (or, at least nomal)? Seems to me now that if I paid more of the balance off, my payments should go down over the agreed 5-year financing period. The way they did it, it seems that by financing the car I agreed to a fixed profit margin for them—that remains unchanged no matter what.

Hope I'm being clear. Is this normal car financing? I bought my only other new car with cash.

Thanks for any insights.

marlowe
 

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This is the normal financing procedure:
You can make payments greater than those required and your monthly payments will not change. That would, in effect, require rewriting your loan agreement every time you pay over the schduled amount.
Your TOTAL balance however will go down faster and you'll pay the car off sooner. (In some rare cases there's a "prepayment penalty" which is a question that should be asked when you sign the loan papers.) Odds are that's not factor hut you might check it out.
So.. If you make double payments each month, your five year loan will be paid off in two and a half... and you save a bunch of interest.
Unless there is no other option, financing through the dealer is usually more expensive than (for example) a Credit Union or even a bank where you do business.
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Finance Question

Aren't the finance charges written into the coupon charges so that even if you double coupon and payoff sooner you will still have paid off the same amount only in a shorter period.
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Yes..that may well be true and I should have added that caveat. With my Credit Union, they charge interest on a monthly balance basis so it gets cut short on an early payoff. Perhaps not true with every lender. ~JD~
 

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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.
 

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If you have a large lump sum coming and you want to use it to reduce your payments rather than pay off sooner, you can refinance. The interest on the loan normally accrues over time, so unless there is an early repayment penalty, you will pay less by paying a lump sum in the middle of the term even if your payments continue to be the same size. Some loans will drop the minimum payment until you "catch up" to where you would have been on the regular payment schedule. You should call the bank holding the loan to find out (the dealership usually transfers the loan to one of the major banks).

I initially financed through my dealership because they were able to get very close to the low rate my Credit Union offers and I was able to drive off without worrying about bringing them a check. The CU subsequently offered an even better deal with a rebate and no-fee refinance, so I have refinanced the loan. I actually increased my payments to take a shorter-term lower interest loan, but refinancing a car loan is certainly possible depending upon the bank or CU you use.
 

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Just one thing to watch out for -- not all auto loans are simple interest loans. You should check the loan papers (preferably before signing them :)) to make sure that it's a simple interest loan and not a rule of 78s loan.
 

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Discussion Starter · #9 ·
re: financing

First, thanks so much for the detailed responses. I'm not sure I followed all of it. However, with regard to JDavie's post, that's the situation I fear I'm in. That is, they have calculated interest based on a 5 year loan. Regardless of how much earlier I pay it off, they still make the same amount. At least I do know that there is no early payment penalty.

I'm a little mortified to hear of a 287/mo payment. Perhaps that is on a significantly cheaper model than the one I got (I'm hoping, anyhow). I got mine loaded and it came in at around 29 plus tax. I put ten grand down and my montly payments are aroun $436. (I think I got a rate of approx. 5.9%)

I'm worried that I agreed to a bad loan deal—especially the part about payments never lowering. I don't see how, under the arrangement I have, that I save any money by paying off early. In fact, I'm quite certain I don't.
 

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Marlowe..
I ran your figures through a loan calculator. You didnt say how much over $29K for tax so I used $30K (minus $10K down) as your loan amount. If your total loan was/is much below $20K these figures aren't valid.

$20K for 5 years at 5.9% = 60 payments of $385.73.

Off hand your payments of $436 seem too high BUT.. don't please take my word for it. I'm NOT a loan officer (but I did sleep in a Prius last night.)
It does seems that some QUESTIONS are in order. Call your lender.. Ask em how they computed your payments. Can you pay off the loan at any time without penalty?
On the other hand you should have some loan paper work that answers some of these questions. Read the fine print.

I'll take another careful step onto the ice and GUESS that you DO NOT have a prepayment penalty. Most car loans don't. It should have specifically discussed with you if there is. Folks with lousy credit ratings and no money down may have to accept such terms. With 1/3 down you should look pretty good on paper. Any reason why not..?

Time to get smart and look after your own interests. Car dealers (or anyone else selling credit) surely will NOT. ~JD~
 

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Financing Question

I take it that I can save a considerable amount then if I want to sell my car with title in hand and call for an immediate buy out figure?
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Hyp: If there is a payoff (buy out) figure with some lender...you obviously would NOT have the title. They keep that till you pay off.
Was that a loaded question..? Do I feel someone pulling our collective leg..? ~JD~
 

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Generally car loans work one of two ways: Simple interest (like a mortgage) or the Rule of 78s. If the latter, you have been screwed! The rule of 78 calculates the total interest cost for the term up front by adding the numberic value of the months for a year (ie jan=1 ....dec=12, sum=78). The first month your payment is 66/78 interest and balance principal, and so on. You have agreed up front to pay all the interest for the entire loan duration and any prepayments will not impact the total interest charge you end up paying - good for the bank bad for you.

With simple interest it is just like a mortgage -- you pay interest based on the total outstanding balance for the time you have the money. If you finance $29K and one day later decide to pay it all off you will owe little more than $29K. With the rule of 78s if you make that same choice you might owe as much as $34K after one day depending on the rate and duration of the loan.
 

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JDavies,

Your interest calculation for your example is way low. Simple interest or amortized arrears loans, you have to push the figures through an amortization. And good financial calculator will do that and many web sites have financial calculators that will amortize a loan. I might have time this weekend to revisit this and give a true calculation from my tools, which are my tools at work also.

Also, there is a pretty significant difference between a simple interest loan and an amortized arrears loan. Mortgages are amortized arrears, some are 30 day months 360 day year, and others are actual day months 365 day year. Depends on the financial institution. On those loans you are charged interest based upon the last known outstanding principal balance for the 30 or 31 days of interest.

On a simple interest loan you pay interest from payment date to payment date.
 

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Financing

Your interest calculation for your example is way low
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Well..I said I wasn't an expert. I found a "CAR LOAN CALCULATOR" on line. I ran my own car loan in it and it matched my payments so I figured it was a safe test to offer Marlowe.
Of course there are several ways to figure interest and you can get screwed if you're not alert. But a $20K, 5 year loan @ 5.9% should not run over $400 a month unless you're using smoke and mirrors. ~JD~
 

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Discussion Starter · #17 ·
re: financing

Well, I'm getting more and more nauseous as this thread continues.

Here's what I know for sure about my financing.

I'm financing $23,606.55 over 5 years.
My rate is 5.95%
My "Finance charge" has already been calculated at $3,809.25.
(although I DO NOT have an early payment penalty, it seems the finance charge remains, regardless of my payment shedule).
My montly payment is $456.93

That's all I know. If the truely knowledgeable have any thoughts, I'd very much appreciate hearing them (minus the "you should have's"!—I only need to know if there's anything I should do now!).

Thanks, again, to all!!

marlowe
 

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Re: re: financing

marlowe7 said:
Well, I'm getting more and more nauseous as this thread continues.

Here's what I know for sure about my financing.

I'm financing $23,606.55 over 5 years.
My rate is 5.95%
My "Finance charge" has already been calculated at $3,809.25.
(although I DO NOT have an early payment penalty, it seems the finance charge remains, regardless of my payment shedule).
My montly payment is $456.93

That's all I know. If the truely knowledgeable have any thoughts, I'd very much appreciate hearing them (minus the "you should have's"!—I only need to know if there's anything I should do now!).

Thanks, again, to all!!

marlowe
I think you should have someone that you trust look over your actual loan papers. For example, it doesn't really mean anything that the monthly payment doesnt change and that the total finance charge has been calculated. The precalculated finance charge could just be part of the disclosure that says how much you would pay in interest over the course of the loan if you paid on the standard schedule. And the fact that the payment doesn't change is normal -- it means that you have to pay at least $456.93 each month, as long as the balance is at least that high. For example, if you decided to make a very large payment of $23,000 in the first month, your remaining balance would be $606.55 (plus the first month's interest), so you'd have to pay $456.93 the second month -- you couldn't say "hey, I have 59 months left to pay off a balance of less than $1000, so I'm only paying $100 this month". Then in the third month (after paying $23,000 the first month and $456.93 the second), you'd just pay the remaining balance (which would be less than $456.93) and be done with the loan. Nothing that you've said so far has really been inconsistent with a loan that works this way.

On the other hand, there are loans that work differently, and what you've said has been consistent with them, too. So it would be good to have someone read the words in the loan contract, not just the numbers.
 

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Discussion Starter · #19 ·
Re: financing

I agree, I should have someone look over the papers. However, I quibble with your statement that it doesn't mean anything that the monthly payment doesn't change, etc. That's just my point: they've already calculated their profit for the loan over a 5 year period. My monthly payment is based on that number. I could pay off the entire balance tomorrow and they would still make their three grand (or so). That's what happens if the monthly stays the same.



[/quote]
For example, it doesn't really mean anything that the monthly payment doesnt change and that the total finance charge has been calculated. The precalculated finance charge could just be part of the disclosure that says how much you would pay in interest over the course of the loan if you paid on the standard schedule.
On the other hand, there are loans that work differently, and what you've said has been consistent with them, too. So it would be good to have someone read the words in the loan contract, not just the numbers.[/quote]
 

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Financing

I quibble with your statement that it doesn't mean anything that the monthly payment doesn't change, etc. That's just my point: they've already calculated their profit for the loan over a 5 year period. My monthly payment is based on that number. I could pay off the entire balance tomorrow and they would still make their three grand (or so).
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OK one more effort then I'm outta here coz I don't want to make you more nauseus .
Facts: I financed my entire car with my credit union. (A fully equipped 04 Prius at MSRP.) Nothing down. 5 years at 4.74% Total out the door price about $28000 w/ CA tax, lisc etc. Total financed: $32500 (close) or 60 payments of $545.00. I made big ($2000+/-) monthly payments for 9 months. Payments stayed the same. During the 10th month I called the CU for a PAYOFF. They computed interest UP TO THAT DAY and gave me a figure. It was good till Friday that week when interest would be re-computed. I sent em an electronic payment. I called Friday and confirmed their receipt of the payment. I got a paid-off receipt and my pink slip (CA Title) about 10 days later.
My original CU loan agreement also showed the total interest to be paid over 5 years as a separate ($3828.00) amount....like yours...but that was re-computed when I PAID OFF the loan. I did NOT pay the full 5 years interest.. Just 10.5 months @ 4.74%. This is NORMAL procedure for most lenders. Nothing unusual.
BTW.. 5.9% for 60 months is NOT a bad deal.
Find a generic (unsponsored) CAR LOAN CALCULATOR on line There's a number of em. Put in your figures and see if your payments match. OK..? Fatherly advice not wanted.. none offered.. It's just hard habit to break.. I apologize .. ~JD~
 
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