Living on a Budget, Saving Money/auto loan
Just bought a car and am financing it through the dealer (they had a better rate than the one I found elsewhere). The financial manager at the dealership told me that I would be paying a simple interest loan. It is for 60 months but he said that there is no prepayment penalty so I can pay it off as quickly as I want, which I plan on doing in 36 months. My question is, on the back of the finance agreement it says this:
"You may prepay all or part of the unpaid part of the amount financed at any time. If you do so, you must pay the earned and unpaid part of the Finance Charge and all other amounts due up to the date of your payment. If the minimum finance charge is greater than the earned finance charge you may be charged the difference. The minimum finance charge is as follows-$25 if the original amount financed does not exceed $1000 (2) $50 if the original Amount Financed is more than $1000 but not more than $2000 or (3) $75 if the original amount Financed is more than $2000."
What exactly does that mean? Under "Total Payments" it says $9,183.00, which is the Amount Financed ($8,868.35) plus the Finance Charge ($944.65) at and APR of 3.99%. The way I understand this is that the Finance Charge is calculated based on my 60 month term so if I finish paying in under 60 months, the Finance Charge will be lower, thus my "Total Payments" will be less. Is this correct? I'm not exactly sure what that statement above means, but it seems to contradict what my understanding is because it says I "must pay the earned and unpaid part of the Finance Charge."
Isn't reading all of this legal mumbo jumbo fun? I can understand your confusion. Here is how I read it, which I will break down into sections:
You may prepay all or part of the unpaid part of the amount financed at any time. If you do so, you must pay the earned and unpaid part of the Finance Charge and all other amounts due up to the date of your payment.
The key part here is "up to the date of your payment," meaning that you are responsible for all of the finance charges and interest up to that point in your payment cycle. So let's say you pay $110 a month, of which $10 is the interest (not realistic numbers, I know, but simple math). You would owe $10 in interest for that month + the total amount left on your payoff at that time. In essence, you are still responsible for the interest for that month that you pay off your loan. You will also pay a minimum finance charge of $75(because the loan was over $2000), so the dealer was a little incorrect (but not legally wrong)for telling you there was no prepayment penalty. It's not a penalty, it's a "finance charge." This is not at all an unusual charge, just so you know.
So, let's say you pay off your car loan in January of 2014 for instance. You call the finance company and they say you have a $5000 payoff (total left that you owe, not including interest past that month). This will include that particular month's interest (the $10 from the example before) plus at LEAST the $75 finance charge to your total (because it says "minimum finance charge in the legalese above). To get a better idea of what I'm saying, please note that you can call your finance company at any time and ask for your payoff amount. That doesn't mean you're paying it right then, you can just say you want to know what the amount is.
(My opinion is just that - opinion. It is neither legally binding nor deemed to always be correct. I base all responses on my knowledge obtained while gaining my MBA and through life experiences. I do my best, but please remember that I am a volunteer, not a legal authority. Best wishes to all!)