|
 |
Preapproved Loans... Page
4
continued
Haggling For A Loan
It is possible to negotiate on loans. You can make a deal on the fees as well as the
interest rate. This is particularly easy when you have already researched loan rates with
a number of institutions and know what you should be paying. The worst possible situation
is to go into a car dealership at the time you are ready to buy and not know the interest
rate appropriate to your credit history. The research will tell you that the 16 percent
rate the dealer is quoting you is way too high because your credit union already told you
they would lend you the money at 8.5 percent. Knowledge is everything.
Last But Not Least
There is a unique vocabulary used by the lending industry. Here are some of the words you
are likely to hear and what they mean:
Principal: The part of the loan that pays for the car. This will reflect the
price you negotiated with all the additional features you choose, less your down payment.
This is the amount of money you are actually borrowing.
Interest: The rate you are being charged for borrowing the principal. It
will be quoted as a percentage of the principal. There are 3 common forms of interest
calculations: Simple, Actual and Rule of 78s.
Simple Interest: The amount charged is based on your unpaid principal
balance, the interest rate on your loan and the number of days since your last payment. If
you make payments earlier, your principal balance is paid down faster and vice versa.
There is no built-in prepayment penalty with a simple interest loan.
Actual Actuarial Interest (or precomputed loan): The monthly payment is the
same and the amount of each payment which is allocated to principal and interest is
"precomputed" assuming you make your payments on time each month. Paying a few
days earlier or later each month does not affect the amount of principal that you owe.
There is no built-in prepayment penalty with a precomputed loan.
Rule of 78s: Form of calculating earned interest. The interest is earned
faster than in a normal calculation as you pay more of the interest you owe in the early
monthly payments than the principal. Essentially it works in a prepayment penalty. Many
states don't allow this. Try to get loans that are not computed based on this rule.
Loan Prepayment: Paying off a loan early. Comment: not necessarily a good
idea given that many car loans have much lower interest rates attached to them than you
can earn with an investment. Use your normal cash flow to earn a higher rate on an
investment rather than attempting to pay a car loan off quickly.
Prepayment Penalty: A fee you pay if you pay the loan off early. This is the
lending institution's way of taking as much profit as possible. If you pay the loan off
early, they are left with cash that isn't earning interest, unless they reloan it. So you
are paying for the privilege of giving them more money to loan.
Down Payment: Money you pay to reduce the principal, the money you will
borrow under the loan.
Subvention (subvene): The way subvention works is that the
finance captives offer the low interest rate loan and the manufacturers subvene or
subsidize the captives for making below market rate loans.
Reprinted with permission of WomanMotorist.com.
Woman Motorist is the leading consumer automotive publication for women on the web
reaching half a million readers annually. It's modern, user-friendly interface, along with
in-depth feature articles and striking photos provides a comprehensive resource for all
things automotive in a female-friendly environment.
Automobile Calculators:
-------------------------
• Should I lease or purchase?
• How much will my monthly payments be?
• Which is better: a rebate
or special dealer financing?
• Which is better: new or used? |
