Author Topic: Early car loan repayments  (Read 2021 times)

Hamster

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Early car loan repayments
« on: November 16, 2017, 09:07:32 pm »
So let's assume a "bad" financial decision is imminent and you want to buy a car. For the sake of the example we take the possibly worst option and finance it with a balloon payment (let's assume R200k with a 25% balloon (R50k) over 60 months). You stumble across a lump sum and pay off some of the debt. Do you:

1. Reduce your monthly repayment amount (sopay less each month)

2. Reduce the term of your loan (pay the same amount but for a shorter time meaning less interest)

3. Pay off the balloon amount.

Asking for a friend.

gcr

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Re: Early car loan repayments
« Reply #1 on: November 16, 2017, 10:48:19 pm »
Hamster - it really depends on how you structure the contract.
I will use my case as an example as I have just paid off my vehicle
I made a sizable deposit when purchasing the car and used my then current car as a trade in as well. I structure the deal over 72 months (with a 20% ballon payment) as I wanted to keep the monthly repayments below R 6,000 per month. The instalment came in at about R 5900 for the car that I purchased, but ideally I only wanted to pay R 4,000 per month as that was financially acceptable to me as I am on pension. I also put a proviso in the contract that I could introduce capital within the overall period at my discretion and then choose either to reduce the monthly premium, or, retain the same monthly premium and as such conclude the contract quicker than 72 months. I also stipulated that I could also pay off the balloon payment at anytime and again choose reduced monthly premium or shorten the repayment period. One thing that needs to be borne in mind is that if you pay off you contract period quicker than agreed the bank can invoke penalties for early repayment. This needs to be sorted out as in my case they wanted to charge me some R 5,000 in penalties which I contested on the basis that I had recorded in the contract that I could introduce capital and choose to reduce premiums, and or shorten the period. The question of penalties was never explained or pointed out to me at signing of the contract so in effect it was not a condition of the contract that I would be called upon to pay penalties. Also banks have a responsibility to explain the T & C's to you. I always ask the question "What T & C will or may have an effect on me financially that I should know about now and in the future" - if they don't run you through them then it is an omission on their part and they may not charge the penalties. Ultimately I did not pay any penalties for early exit from my contract and exited after 40 of the 72 months
Prior to signing any documents with a bank ask all your question and get satisfactory answers and in need have special or specific answers included in the contract - banks love to have reams of T & C's but never explain them and they are duty bound to explain them to you. I quite often record above my signature "T & C's not explained" I was in banking for many years     
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Hamster

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Re: Early car loan repayments
« Reply #2 on: November 17, 2017, 04:45:05 am »
Was not aware they're still allowed to charge penalties for early exit.

So what strategy worked best for you? Did you reduce the term length or balloon payment amount or does it come down to the same thing?

I'm thinking of taking a balloon payment myself to keep the monthly costs down and I'm pretty sure I can cover the balloon within the next year or two. I have no interest in being the bank's bitch for the next six years.

Hamster

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Re: Early car loan repayments
« Reply #3 on: November 17, 2017, 09:56:58 am »
Asked the same question on another forum. Over 500 views and no answers and on here 20 views with one answer.

Not sure if that indicates anything. Like either there are more lurkers on the internet than I previously thought or people in this country tend to buy cars without knowing that they can structure deals in different ways or that there are pros and cons in the way (or even that you are able to) paying off the car in different ways.

gcr

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Re: Early car loan repayments
« Reply #4 on: November 17, 2017, 10:14:28 am »
Was not aware they're still allowed to charge penalties for early exit.

So what strategy worked best for you? Did you reduce the term length or balloon payment amount or does it come down to the same thing?

I'm thinking of taking a balloon payment myself to keep the monthly costs down and I'm pretty sure I can cover the balloon within the next year or two. I have no interest in being the bank's bitch for the next six years.
After running the contract for 18 months I made a capital injection of R 100,000 and reduced premium closer to
R 4,000. Then when I paid the balloon payment 9 months ago and they wanted to reduce the premium further I instructed them to hold the premium at R 4,000, and this month I paid off the contract fully - so was out after 40 months
I also have an aversion to using my own capital (which I could have done in this case) as it is normally difficult to replenish used capital as you get lazy trying to claw back the capital
As to your question regarding meeting balloon payments maybe look at getting agreement within the contract that you can introduce capital within the continuum of the contract period and also pay off the balloon payment early. Ensure that they clearly understand this and ensure that it is in writing between yourself and the bank. Banks are notorious for tying you up with T & C's and expect you to read through them all and understand without having to explain anything, and are quick when a dispute occurs to say "did you read the T & C' - when in reality they should highlight and discuss with you prior to signing.
Also when having your discussion with your bank as them for a better rate on the contract especially if you have a number of accounts with them, and if they are no prepared to reduce the rate then advise them that you will approach other banks to get a better rate and could well move all your accounts to the preferred bank
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JohnnyH

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Re: Early car loan repayments
« Reply #5 on: November 20, 2017, 03:46:43 pm »
So let's assume a "bad" financial decision is imminent and you want to buy a car. For the sake of the example we take the possibly worst option and finance it with a balloon payment (let's assume R200k with a 25% balloon (R50k) over 60 months). You stumble across a lump sum and pay off some of the debt. Do you:

1. Reduce your monthly repayment amount (sopay less each month)

2. Reduce the term of your loan (pay the same amount but for a shorter time meaning less interest)

3. Pay off the balloon amount.

Asking for a friend.

From my own experience (Wesbank), we only paid something like R375 for early "termination" in 2015. At the time the account was linked to my FNB account & we just started paying in R1000pm extra when we could. We kept our monthly payments constant as we had no other debt. It was really cool to see the number of months that we still need to pay come down steadily.

If you have the full R50k now, maybe pay off the balloon if possible? I think it would have the biggest impact (interest savings) seeing that there is still six years of payments left (If I understand you correctly).

Otherwise paying in the full amount would probably reduce the term quite a lot, also a big win.

By the way, I didn't even know its an option to pay the balloon amount at any time...I always just assumed that you had to wait till the end.

Hamster

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Re: Early car loan repayments
« Reply #6 on: November 20, 2017, 04:08:02 pm »


From my own experience (Wesbank), we only paid something like R375 for early "termination" in 2015. At the time the account was linked to my FNB account & we just started paying in R1000pm extra when we could. We kept our monthly payments constant as we had no other debt. It was really cool to see the number of months that we still need to pay come down steadily.

If you have the full R50k now, maybe pay off the balloon if possible? I think it would have the biggest impact (interest savings) seeing that there is still six years of payments left (If I understand you correctly).

Otherwise paying in the full amount would probably reduce the term quite a lot, also a big win.

By the way, I didn't even know its an option to pay the balloon amount at any time...I always just assumed that you had to wait till the end.

Didn't know about the option either it heard it is there. The financial numbers are there as examples so not accurate. Go big or go home right (according to my friend *cough*)