Early termination of Loan - OUCH!
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  1. #1
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    Default Early termination of Loan - OUCH!

    Just learned a painful lesson on the mystery of car finance:
    early termination of a car loan is excruciatingly expensive.
    Instead of $612 interest for 36 months, I paid $867 for 10 months to clear my modest car loan at 3.9%.
    Just wondering what the termination payout would be on a 0% loan? You have been warned!

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  2. #2
    Fellow Frogger! MIKEEE's Avatar
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    I'm mystified as to why your are surprised. Everything would have been laid out when you signed up for the loan.

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    Fellow Frogger! RickHy's Avatar
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    generally you have to pay a % of the unpaid interest on the contract. Eg if you had a 3 yr term loan of 100k at 1 %. You would have $3000 in interest to pay over the term. IF you paid out after 1 yr you have 2 yr ($2000) unpaid interest. You would have to pay a set % of that interest to terminate early.
    The financiers will do this as they would be budgeting to get there $3000 interest on that case. IF you opt out early they will want to get some of that lost interest.
    I might be wrong ?
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    bob
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    G'day,

    there used to be two sorts of loans.....

    One you generally got from the bank, on which they charged you interest on the amount outstanding at the beginning of each period. The "period" could be anything from daily to, usually, monthly, but it could be quarterly.

    The other sort was where the interest you were going to pay over the life of the agreement was added to the principal when you signed up and they just divided that amount by the number of, say, months, for your payment amounts.

    With the first one, if you paid out early they generally charged you the next period of interest as a fee for putting them to so much trouble. With the second type, you owed the lot from day one, regardless.

    I could be wrong here, but I believe that eons ago the government brought in some rules about these mongrels getting stuck into you when you paid out early, something like the "Money lenders Act". Which placed limits on how far the lenders could bleed you - regardless of what was written in the contract you foolishly signed.

    You might like to do some research......

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    Hmmm...maybe the OP should have understood the contract better, but to be honest, this is a totally new form of finance to any I've encountered...and I recently had a new car loan! Sounds like a bulls**t idea to me!
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    Bertie
    Car finance is what we term fixed rate financing in banking. All companies that offer this including renault's in house bank (BCI) or Nissan Financial Services hedge their net positions through interest rate swaps. If someone breaks, then they will need to do the same, albeit the companies have the luxury of rebalancing their portfolios before re-hedging. In short, think of a fixed term home loan - same concept: break and you will essentially pay the present value differential.

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    Should get a life 2353's Avatar
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    A colleague was telling me today he's just signed up for a new Focus at 2.9% comparison rate over 4 years. Total interest is around $600. If he pays it out early, the penalty is $1000! I can understand the "penalty" for loss of earnings - but that seems a little extreme.
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    Quote Originally Posted by 2353 View Post
    A colleague was telling me today he's just signed up for a new Focus at 2.9% comparison rate over 4 years. Total interest is around $600. If he pays it out early, the penalty is $1000! I can understand the "penalty" for loss of earnings - but that seems a little extreme.
    That's one of those "you pays your money and you takes your choice" situations. His option is not to get a new Focus of course.

    As soon as you borrow money on a car, the lender does need to make a profit to stay in business. Having said that, and being honest with myself, I doubt I'd know all the sordid details myself if I took out a loan and then tried to pay it off early! We've only bought one new car in 40 years and we have that one still, 18 years later. Yes a loan, and yes it went full term (four years).
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    Quote Originally Posted by 2353 View Post
    A colleague was telling me today he's just signed up for a new Focus at 2.9% comparison rate over 4 years. Total interest is around $600. If he pays it out early, the penalty is $1000! I can understand the "penalty" for loss of earnings - but that seems a little extreme.
    Extreme indeed! To cover for 'forfeited earnings' and 'administration' when someone terminates their loan early is understandable and I was aware of the 'fine print' ($780 penalty), but changed circumstances, eg: market interest rates, my ability to pay etc motivated me to get rid of the loan.
    However, imagine the money this scam er...scheme rakes in for the finance companies, considering how many cars are bought, traded and paid out all the time. It also depends on the size of the loan, that is, $780 on a $10K loan is huge, while negligible on a $100K loan.

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    We once "lost" over $10k for early termination of an interest only mortgage. We didn't realise until after the property sale went through. However it was our fault for not re-reading the original mortgage contract that we had quite happily signed some years prior. Idiots!
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    Quote Originally Posted by Breitie View Post
    Extreme indeed! To cover for 'forfeited earnings' and 'administration' when someone terminates their loan early is understandable and I was aware of the 'fine print' ($780 penalty), but changed circumstances, eg: market interest rates, my ability to pay etc motivated me to get rid of the loan.
    However, imagine the money this scam er...scheme rakes in for the finance companies, considering how many cars are bought, traded and paid out all the time. It also depends on the size of the loan, that is, $780 on a $10K loan is huge, while negligible on a $100K loan.
    It was rumoured, and I had no reason to doubt it, that the finance companies do very well out of sole operator semi-trailer folk. Huge loans, pressure to drive almost incessantly, and most small businesses go broke within a couple of years. Operator goes belly-up, truck is repossessed and then sold to another, with another big loan of course. Tough business.
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    Quote Originally Posted by JohnW View Post
    It was rumoured, and I had no reason to doubt it, that the finance companies do very well out of sole operator semi-trailer folk. Huge loans, pressure to drive almost incessantly, and most small businesses go broke within a couple of years. Operator goes belly-up, truck is repossessed and then sold to another, with another big loan of course. Tough business.
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    The Renault finance on my Megane is 1.9% for 3 years. It has a 1500 termination fee that is reduced by a 36th each month. By my calculations I am going to finish paying the loan a month early which will mean that I will end up paying them an extra months worth which means that I will pay one extra payment.

    I'm trying to see if I can skip a couple of payments so that I get back on schedule.

  14. #14
    COL
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    Quote Originally Posted by minigordini View Post
    The Renault finance on my Megane is 1.9% for 3 years. It has a 1500 termination fee that is reduced by a 36th each month. By my calculations I am going to finish paying the loan a month early which will mean that I will end up paying them an extra months worth which means that I will pay one extra payment.

    I'm trying to see if I can skip a couple of payments so that I get back on schedule.
    At that interest rate I would just let the loan run its course, go and invest your money somewhere else that pays more interest you will be in front that way
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    Fellow Frogger! cam740's Avatar
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    so what would happen then if the car was written off in the meantime???

    Could get stung from both ends, IE not getting enough to cover the value of the loan for the car, and then getting hit by the finance company for the early payout

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    Quote Originally Posted by cam740 View Post
    Could get stung from both ends,
    Look at it from the POV of the lender as well, they don't know whether the borrower will default and never have the thing serviced, leaving them with a liability when it gets repoed. It is all about risk. Either pay for the car outright with a briefcase full of cash, and forego the opportunity cost. Or go the interest free/low interest route, whilst sticking a balance in a high-interest term deposit to come out ahead at the end of the term.
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    These low/free interest loans are good if you read all the conditions and stick to them. The thing you must never do is rely on the good intentions of the loan provider. Assume they are trying to screw you and then work out the best way to screw them. I can't see why you would pay out a low interest loan early, just schedule a monthly payment from your account and forget about it, as Simon says you can put the money in an interest bearing account and come out ahead.
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    I used to audit loans for a living, and saw all sorts of things. The most extreme example I saw was someone increasing their home loan for $37,000 to payout the shortfall on a lease, and payout costs after losing their job. The poor/stupid guy had also terminated his previous lease early, and capitalised the shortfall, and termination payments into his new lease so was behind the 8 ball from the start. After having his new car less than 12 months, he lost his job, and this novated lease didn't allow him to walk away (as some do if you lose your job). Worst thing was the car was only about $70k new, so he ended up paying over half the car value for up to 30 years on a car he no longer had.

    Finance companies often offer a 'better deal', but in my experience personal loans through banks and building societies tend to be more transparent in their fees, even if they do charge a higher interest rate.

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    Quote Originally Posted by minigordini View Post
    The Renault finance on my Megane is 1.9% for 3 years. It has a 1500 termination fee that is reduced by a 36th each month. By my calculations I am going to finish paying the loan a month early which will mean that I will end up paying them an extra months worth which means that I will pay one extra payment.

    I'm trying to see if I can skip a couple of payments so that I get back on schedule.
    $1500 is ten times what I paid for my car...perhaps there is some value in fixing an old one after all, if you've got the skills, shed space...patience...

  20. #20
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    Quote Originally Posted by Bruce Llewellyn View Post
    $1500 is ten times what I paid for my car...perhaps there is some value in fixing an old one after all, if you've got the skills, shed space...patience...
    You bet there is. Compared with a 13k$ loan for a s/h Camry which translates in about 17k$ payment, I drive a 2000$ pug that cost me nothing if I don't do anything on it. I expect by the time my friend would have finished paying his loan I would have spent in total about 3k$ on my pug. The only advantage I accept his Camry has over my car is aircon.

    Even better, I have another friend who gets beat up old clunkers for next to nothing (or free) and drives them into the ground (doubt he ever changed the oil in any of them) and then moves on to the next.
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    Fellow Frogger! Bruce Llewellyn's Avatar
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    Quote Originally Posted by schlitzaugen View Post
    You bet there is. Compared with a 13k$ loan for a s/h Camry which translates in about 17k$ payment, I drive a 2000$ pug that cost me nothing if I don't do anything on it. I expect by the time my friend would have finished paying his loan I would have spent in total about 3k$ on my pug. The only advantage I accept his Camry has over my car is aircon.

    Even better, I have another friend who gets beat up old clunkers for next to nothing (or free) and drives them into the ground (doubt he ever changed the oil in any of them) and then moves on to the next.
    Mine's got air.

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