I haven’t seen a note with an early payoff penalty in many years.
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True. It rapidly moved into the “things that aren’t there anymore” category.
Thanks y’all. I think I’ll accept the financing. I was approved through ford credit so the rebates are awesome. I’ll pay it off in a couple of months as help my credit at the same time.
Yeah I don’t think the rule of 78ths anymore is used. At least not much and if it is, be careful. Essentially it just means that for the first half of the loan term you are paying mainly the interest and in the second half you are paying off the principal. No problem unless you want to pay off early.
A story: Back in the bad old early 80’s with 20% interest rates, I laughed at my CPA BIL who got a car loan for 17% as a special favor from the bank. Then I needed a car and the bank charged me 18%. He who laughs last . . . So two years later when the rates came down a little, I went down to the bank to re-finance the thing and the VP said why bother? It won’t make any difference because the first two years I was paying mainly interest. That was the last car loan I got from the bank under 78ths and that’s why I put 480,000 miles on my 81 Olds trying to get my money out of it. So listen to your elders.
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@bing is correct. Dealers would much rather you finance because it means more money for them. They have what’s known as “dealer reserve” when you finance that means that they’ll add a point or two of interest on top what they’ve been quoted from the lending institution and keep that for themselves. Also dealers know that someone who pays in cash is very unlikely to buy high margin extras like extended warranties, undercoating or the Trucoat miracle wax.
One way of handling this is to get the the OTD numbers for the vehicle and maintain to the salesman that you haven’t made up your mind yet and/or claim you that only discuss payment options with the person whose directly involved in handling the money.
??What is that??
If you do a search on “the rule of 78s”, you’ll get lots of material to read.
Here’s a snipit from investopedia:
The Rule of 78 is a method used by some lenders to calculate interest charges on a loan. The Rule of 78 requires the borrower to pay a greater portion of interest in the earlier part of a loan cycle, which decreases the potential savings for the borrower in paying off their loan.
Key Takeaways
- The Rule of 78 is a method used by some lenders to calculate interest charges on a loan.
- The Rule of 78 allocates pre-calculated interest charges that favor the lender over the borrower for short-term loans or if a loan is paid off early.
- The Rule of 78 methodology gives added weight to months in the earlier cycle of a loan, so a greater portion of interest is paid earlier.
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Now why would anyone take advantage of the web search resources to find an answer to a question.
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When I bought my2004 Pt Cruiser there was a $5000 rebate if I used Chrysler Financial Services. I asked how much would I have to finance and it was $7500 and no prepayment penalty. It tool 4 days to get a payoff figure and it was $7521. I got the check to them sooner than they expected and they sent me back $11. When the car was totaled 7 1/2 years later I got a check from my insurance for almost exactly what I had paid for it.
Like others here, I never discuss trade in, financing or upsells until we have a clean deal agreement on price. When I bought my 2012 Camry I beat Truecar by about $1200 in Dec. 2011. It required a lot of attempting to leave. We actually agreed after I got back out to my car.
When I was growing up, we did business with a mom and pop grocery store and gasoline station. The proprietor had this sign posted:
WE DO NOT CASH CHECKS.
BANKS DO NOT SELL GROCERIES
I wish the same was true about auto dealers. The sign would read:
WE DO NOT DO FINANCING.
BANKS DI NOT SELL VEHICLES
I have always paid cash for my auto purchases. I go for the best cash price and then write the check. I skip the extended warranty and over the 58 years I have owned automobiles, I have saved enough money by not purchasing extended warranties to pay for any needed repairs.
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That is not going to happen because not everyone can qualify for a bank loan where the dealer can shop the loan to get financing for those people. Plus sometimes the dealer can beat the local banks on the rates. Plus the convivence of one stop shopping for busy families.
@VOLVO_V70. I know it’s not going to happen. A car salesman is supposed to sell the car, the financing and credit life insurance on the financing as well as an extended warranty on the car.
I had colleagues in the math and computer science departments when I was still teaching that would buy a car and only ask about how much each monthly payment would be.
Our credit union had lower interest rates than the financing the dealer was offering, but I guess it was too much trouble to arrange the loan in advance.
+1
Also… welcome back to the forum!
You were missed by several of us.
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@VDCdriver. Thank you. It’s good to be back. I spent the last couple of weeks preparing grants for a chamber orchestra and trying to keep up with household repairs.
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Also welcome back.
The Fed is all caught up in the situation and like so many political situations there is a need to justify all policies. Easy money is poured into the mix to increase sales and it is absolutely urgent that there is documentation that the policy is working as planned. It really is just that simple.
The rule of 78’s tell you how long it will take an investment to double at various interest rates. I don’t see how it is used to calculate the pay off of an existing loan.
I used to know the formula for calculating the monthly payments for a loan based on interest, duration and amount, but have long forgotten it. I have also had some computer programs that would do this calculation and give the remaining balance at any given point in the loan. I haven’t seen any of those lately, maybe there is an app for that.
In its simplest and most honest level, the salesman gets a small commission for getting you to finance the vehicle through their bank.
But in its less than honest forms and more common than you might think, it is used to defraud you of some extra money. The salesman draws up a contract for the loan that look legit. It lists the balance of the loan, the APR and the monthly payments. If you don’t have “that app for that”, you may not notice that the monthly payment is higher than it should be.
When the salesman sends the loan application to the bank, he includes things you didn’t agree too like that extra coat of wax and the extended warranty you declined, so the bank thinks that you ordered this. They approve and send the money they think you agreed to to the dealer and you get your car. The salesman pockets the extra money and you make the payments never the wiser.
I don’t know if there is an “app for that” for calculating the monthly payments on your cell phone but if there is, I’d get it before agreeing to any dealer financing, just in case.
Yes welcome back. I was afraid you were locked in your basement and they wouldn’t let you out.
I was worried that Mrs. Triedaq might have done you in! Welcome back.
That’s a different calculation to figure out how soon a principle will double. The interest rule of 78ths is a little complicated and the banker had to explain it twice. As follows:
" In the case of a 12-month loan, a lender would sum the number of digits through 12 months in the following calculation:
- 1 + 2 + 3 + 4 + 5 + 6 + 7 + 8 + 9 + 10 + 11 + 12 = 78
For a one year loan, the total number of digits is equal to 78, which explains the term the Rule of 78. For a two year loan, the total sum of the digits would be 300.
With the sum of the months calculated, the lender then weights the interest payments in reverse order applying greater weight to the earlier months. For a one-year [loan]
(What Is a Loan, How Does It Work, Types, and Tips on Getting One), the weighting factor would be 12/78 of the total interest in the first month, 11/78 in the second month, 10/78 in the third month, etc. For a two-year loan, the weighting factor would be 24/300 in the first month, 23/300 in the second month, 22/300 in the third month, etc."
The most common now is simple interest so better ask or read the fine print. You pay the same either way but is only a problem if you go to pay it off early.