krava

I talked to a guy today that has a lot of business degrees. The past 10 years I have paid cash for a car and not financed anything. I learned tonight that there is something called straight line interest. I got financed at 5.6% on the deal thus making it $5,133 in interest over 6 years. I talked to the people I bought the car from and they said it wasn't any early pay off pentaly. I thought that I could pay the car off in 3 years and won't have to pay all that interest. I learned that if I pay it off tomorrow I will be stuck with the same interest. I offered to put more down they said I didn't need to do it. I was going to pay the taxes with my own money and they said no. I could have bought the entire car with cash. I also have proof in writing that I paid the dealership and they didn't put it all in the loan papers. What kind of options do I have left and anyone ever have this happen to them? this could have happened at any dealership. Why do they still get all that interest money if I pay it off in 1 day even???

woropallo

It really depends on what in your loan contract that you signed. If it has a clause with an early payoff penalty or states that you pay the same interest even if you pay it off early, you are stuck. Did you not read the loan document before you signed it? Usually the document spells out what you can do, or not, and if you sign it you have to live by it.

NBP04TL4ME

woropollo is correct. You need top pull out your finance contract and read the contents and obligations you signed. I personally had never heard of this type of loan, until my sister asked me to look at her loan. It sounds the same as what you are describing. She could pay off her loan early but she was responsible for the full contract amount principal and fixed interest. I thought it was sneaky and unfortunate, but I wasn't there when she signed the finance contract.
So again, read what you signed. It doesn't matter what you said, what you verbally agreed to or what you were told. The only thing that matters is what is in the contract and was signed by you and the bank or dealer.

Good luck.

RLX-Sport Hybrid

The verbal words spoken in a deal negotiations mean nothing. The written word is everything. Terms and conditions are important in a contract, and if the dealer structured the loan document to serve their needs more than yours, and stuffed the car with expensive extras you did not need but you paid for, then they won that particular deal. Now you also got a great car at a great price, but they got you on other components of the transaction. This is how lots of people were suckered into buying all kinds of mortgages that blew up in people's faces prior to the financial crisis. Enjoy the car and don't invest more time in attempting to Monday morning quarterback yourself on what you could have done differently on this transaction. Next time you will negotiate the best deal possible in all areas. Happy motoring.

Majofo

This is basic loan 101. Simple interest with no prepayment penalty is what you should have requested. Sounds like you took a pre-computed interest loan. That means the loan amount rolls in the simple interest you would have paid, back into the financed amount, making the interest and principle a static part of your payment.

Essentially, there isn't a payoff penalty. You agreed to pay the interest regardless. A payoff penalty is different. A payoff penalty is a fee for paying off early, which might have been better. If they fined you $1k for paying off early, you still would have saved several thousand.

Live and learn.. also.. your interest financed doesn't sound right. How much did you buy the car for and how much did you put down?

neuronbob

Sigh.

Not trying to be insulting, my friend, but "reading is fundamental". Always know the basics about your loan before you sign.

With most auto loans, there is no prepayment penalty. If you pay off early, there is no way they can make you pay the full interest in the loan unless it says so in the loan paperwork. What that dealer is saying to you (or how you are interpreting it) makes absolutely no sense to me. If you pay your principal early, does the loan contract say you must pay all interest back? If so, that's a form or prepayment penalty. Just doesn't add up to me.

Every car loan I take out, I pay off early and when I do, the bank doesn't chase me for the interest I could have paid over five years.

cu2wagon

In full disclosure, I have no business degrees so please take that into account. As others have pointed out, there is no penalty assessed for paying the entire loan off early but the financial institution expects to be compensated for the full potential value of their investment. Whether or not that is a "normal" capital loaning practice or not is debatable; it certainly makes financial sense for the loaning institution though!

As for options you have left: you may keep paying the loan it the agreed upon amortized schedule, you may pay on the schedule with extra payment applied to the loan, you may pay the loan off in its entirety now or at any time in the future, or you may stop making payments on the loan and allow the financial institution to repossess the vehicle (there might be a few other esoteric options that I haven't considered at this time as well). Note that all of the options that do not involve cessation of payment will require you to pay the full interest value as you have contractually agreed to do in the loan documentation.

As you have inquired, no I have never had this happen to me. In the instances that I have elected to obtain a loan, I have agreed to rates with simple compounded interest with no pre-payment penalties. In nearly all situations, especially with current market conditions, the net-zero interest rate of a cash transaction makes much more sense than obtaining a capital loan. Of course there are exceptions to this rule, but for low-value and liability transactions (such as this), I generally feel that to be true, caveat emptor. I am aware of the loans of the type you have obtained and, in fact, they are the preferred manner of capital investment that I prefer to make to others. Locking in repayment of the total interest, assuming the lendee will be able to complete restitution or has ample collateral, makes great financial sense for the lender.

And as to your question of "why do the still get all that interest money if I pay it off in 1 day even???", the simple answer is because you agreed to give it to them! You signed a promissory agreement with a lender; they provided you with approximately $28,565 and you agreed to pay them back in full, with an additional $5,133, in six years.

krava

Completely sorry about the post. The guy that has 5 degrees I guess he doesn't know what he is talking about. The loan I have is simple interest with no pre payment penalty. The finance charge written on the paper is an estimate of what I would pay if I took 6 years to pay it off and not included in the price. The guy told me I had straight line interest and scared the hell out of me. Then my "smart guy" told me that if I refinanced, I would be paying interest on top of interest. I did take my time and read everything I signed, but I didn't read the back of the agreement since it was stuck with the other parts of the agreement and somehow signed it even though I didn't read that part. How are you suppose to read the back of the contract if it is still attached to the other copies? But anyway I am fine and no interest if it gets paid off. I got $15,500 back after everything was done on the lexus and can apply that to this loan. Right now I am offering to refinance this though them for 3 years and put more money down. You can close the thread, I got all the info I need. I was so upset I didn't even go to bed and felt like throwing up. THanks for all the advice though.