Author Topic: Question about Car Loan  (Read 6400 times)

Sebastian

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Question about Car Loan
« on: March 03, 2014, 07:14:34 AM »
So I few years ago I bought a car brand new! Yes, I know I'm an idiot, and I berate myself on it everyday haha.

I plan on selling it here in the next few months when it gets a little warmer. It's too damn cold to be showing a car off in -9 degree weather, and I don't want to clean it because it'll just get dirty with all the salt.

I have made a really good effort towards paying this car off. Technically, my next payment isn't due till Feb. of next year lol. So here is my question.

Because I plan on selling it off in the next 3-4 months. I was thinking maybe it makes more sense to not make any payments at all and just sell it off then pay off the loan amount.

My minimum payments I've been making at this point are 250/month. So that would be 1000 bucks in the next 4 months.

If I didn't make payments towards it obviously interest would accure, but how much would really accure?? That is really going to determine whether I make the payments or not...

Per Toyota's website Annual Percentage Rate   2.60%... So does that mean I take the remaining balance 6800 * (.026/12) to figure out how much interest I'd be charged per month? That's only like 50-60 bucks. So I think it'd be worth it to just not pay then I can take that 250/month and put it towards investments right?

What do you guys think.

Thanks!

Another Reader

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Re: Question about Car Loan
« Reply #1 on: March 03, 2014, 07:36:37 AM »
TFS is applying your payments to future payments, not to the principal.  They have use of your money free of charge and just tick off the payments as they come due.  In your shoes, I would call them today and insist they apply the money to the principal balance.  Then I would resume payments and make sure the proper amount is applied to the principal.  Sell the car, pay off the lower balance.

phred

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Re: Question about Car Loan
« Reply #2 on: March 03, 2014, 07:39:33 AM »
You're going to skip four months of payments?  Almost certainly you will destroy your credit rating.  Car may even be repo'ed.  Once it's auctioned off you will still owe any balance.

Drew

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Re: Question about Car Loan
« Reply #3 on: March 03, 2014, 07:45:57 AM »
You're going to skip four months of payments?  Almost certainly you will destroy your credit rating.  Car may even be repo'ed.  Once it's auctioned off you will still owe any balance.

The OP said they don't have any more payments until Feb of next year.  Sounds like the prepaid their payments instead of paying towards the principal.

Sebastian

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Re: Question about Car Loan
« Reply #4 on: March 03, 2014, 07:53:32 AM »
I'm just wondering how much interest I will get charged in the next 4 months. I must have wrote my question weird.

Either I

A) Make the next 4 months of payments $250 x 4 = $1000 which I'll inevitably get back when I sell the car

or

B) Don't make those payments use the $250/month to put into investments now, and then just sell the car off and pay back the loan anyways...

I owe 6700 left on the car. I'm thinking I should get between 13-15K for it. I'm going to profit out of it either way. I was just curious if I could essentially put that grand into investments now instead of having to wait till I pay off the car.

huadpe

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Re: Question about Car Loan
« Reply #5 on: March 03, 2014, 08:25:21 AM »
The answer is the same amount of interest because you prepaid your payments instead of applying payment toward principal.  You are paying interest to borrow the money you already paid back!  This is why you should call and insist that your extra payments be applied to principal.

Another Reader

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Re: Question about Car Loan
« Reply #6 on: March 03, 2014, 08:27:50 AM »
You can do that. just look at the amortization schedule to see the amount of interest in the next four payments.  They will credit those four payments as they come due.  You do need to understand that TFS is taking advantage of you by not crediting the principal for the payments made, unless you wanted them to hold payments to be applied later.  This is very common in car loans and folks like TFS make a lot of money this way. 

Sebastian

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Re: Question about Car Loan
« Reply #7 on: March 03, 2014, 08:28:13 AM »
The answer is the same amount of interest because you prepaid your payments instead of applying payment toward principal.  You are paying interest to borrow the money you already paid back!  This is why you should call and insist that your extra payments be applied to principal.

Can they retroactively go back and do that though? I guess I'm confused and don't understand the interest/principle thing. I was under the impression that extra payments did go to the principle anyways..

Sebastian

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Re: Question about Car Loan
« Reply #8 on: March 03, 2014, 08:29:58 AM »
You can do that. just look at the amortization schedule to see the amount of interest in the next four payments.  They will credit those four payments as they come due.  You do need to understand that TFS is taking advantage of you by not crediting the principal for the payments made, unless you wanted them to hold payments to be applied later.  This is very common in car loans and folks like TFS make a lot of money this way.

Ok, but what do I do? Just call and rage at them?

rubybeth

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Re: Question about Car Loan
« Reply #9 on: March 03, 2014, 08:35:31 AM »
You can do that. just look at the amortization schedule to see the amount of interest in the next four payments.  They will credit those four payments as they come due.  You do need to understand that TFS is taking advantage of you by not crediting the principal for the payments made, unless you wanted them to hold payments to be applied later.  This is very common in car loans and folks like TFS make a lot of money this way.

Ok, but what do I do? Just call and rage at them?

I would call and nicely explain that you want to pay off your loan early by making extra payments toward principle, and those extra payments you sent in should not be treated as pre-payments for your monthly payments but should go toward paying down the principle.

Another Reader

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Re: Question about Car Loan
« Reply #10 on: March 03, 2014, 08:38:10 AM »
You call them and ask them why the payments were held and not applied to the loan principal.  They will give you some story about how per the contract they are applied to future payments unless they are explicitly told to apply the money to the principal.  If you want to keep making payments, tell them to apply all outstanding funds to the principal. 

Sebastian

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Re: Question about Car Loan
« Reply #11 on: March 03, 2014, 08:51:46 AM »
I feel like extra payments have gone towards the whole amount of the car though. I mean, every month the loan pay out is lower and lower. How is it only going towards interest then?

FrugalSpendthrift

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Re: Question about Car Loan
« Reply #12 on: March 03, 2014, 09:51:21 AM »
I feel like extra payments have gone towards the whole amount of the car though. I mean, every month the loan pay out is lower and lower. How is it only going towards interest then?
It isn't going towards interest or principal.  They are just holding it until the next payment is due.  If they applied that money to the principal, it would lower your next months interest charge.

If you look at your last payment, you might see  6800 * (.026/12) = ~$ 14.73 in interest.  If you paid an extra $3,000 and it was applied towards principal, then you would pay  3800 * (.026/12) = ~$8.23 in interest for the month.  Instead of actually lowering your interest cost, they are just holding the money to put towards future payments.

Spork

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Re: Question about Car Loan
« Reply #13 on: March 03, 2014, 10:07:35 AM »

Another consideration...  Make sure you understand how Toyota has structured the loan.  Many (many, many, many) years ago, I bought a car financed through Toyota.  They structured it such that the interest amount was divided into equal amounts over the life of the loan.  In other words, they computed what the interest would be using regular old compound interest, then divided that by the number of payments.  I was a young/dumb kid at the time and the salesman sold it as "you have higher principle at the beginning, meaning you pay down the car faster!"  Wahoo!  Of course, the down side of that is: there is no reason ever to pay off the car early.  You're paying the full interest amount NO MATTER WHAT.

I can't say for sure that's how your loan is structured, but... it might be.  And if so... that may be why they're handling the payments the way they are handling them.

mh1361

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Re: Question about Car Loan
« Reply #14 on: March 03, 2014, 11:58:00 AM »
Sheesh. One more reason why car loans are bad news.

the fixer

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Re: Question about Car Loan
« Reply #15 on: March 03, 2014, 04:55:59 PM »
If you want to sell the car private party, it will be much easier if it's already paid off. That way you'll have the title in hand and can sign it over upon payment by the buyer. Otherwise, you'll have to take the buyer's cash, pay off the loan, wait for the title to come in the mail, THEN sign it over. This is an awful lot of trust that the buyer needs to place in you.

Mister Fancypants

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Re: Question about Car Loan
« Reply #16 on: March 04, 2014, 09:45:30 AM »
TFS calculates your interest as simple interest, they take the balance of the loan at the beginning of the month and multiply it by your interest rate divided by 12 for example balance * (interest/12) that is the interest component of your monthly payment.

Since you have overpaid by an amount equal to 4 monthly payments, they have indicated you do not have to make a payment for 4 months.

If you do that, your payment in 5 months will be a much larger interest component then principal but the payment amount will be the same, however the loan schedule will still complete as originally planned and you simply made 4 payments in advance.

If you continue to prepay you will continue to push back your next due date and eventually if you do this enough the loan will be paid off early as the balance will be $0 and there will be no future payments.

So your net savings is the number of months saved from the end of the loan * you monthly payment and then you subtract the overpayments you made. You will see that you have saved more months of payments then you overpaid especially if you were making full extra monthly payments every month.

I know how this works as we had a TFS loan years ago that we prepaid like this, we paid a 5 year loan off in 9 months, and the rate was 1.99% we overpaid by substantially more than the monthly payments. Each payment pushed back the due date by several months. We just continued to make the regular scheduled payments (and our overpayments) until the loan was paid off. For us this was just about managing cash flow, we preferred to pay the car off over a few months then tying up that much cash at the time of purchase. 

So to answer your question if you are confident that you will sell the car before the next payment is due then you are simply sending TFS money in advance for them to send it back to you when you sell the car, however if you don't sell the car to save on the interest you should continue making the payments if this is your best return on investment.

Now I don't recall seeing your interest rate posted to know if this is a cheap rate and worth prepaying or not, or your overall finances so to that I cannot comment.

Also as another poster mentioned selling a car to private party with a lien against it is complicated, as you need to have a lien free title to transfer, TFS will not release the title to the new owner unless they are paid off first, so unless you have other funds to clear the title you might want to consider that before selling to a private party.

http://www.carmax.com/ might be a better option may not be as good a deal but they will work with you on the title issues better. Or some other cars for cash type of operation.

Good luck!

-Mister FancyPants

Sebastian

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Re: Question about Car Loan
« Reply #17 on: March 04, 2014, 09:48:39 AM »
Awesome FancyPants! I apprcieate the insight!