Enter the length of the loan, interest rate, and loan amount and compute what the payment should be. what they quote? What is wrong with their numbers? Let see what they are really doing. Ask for a amortizing loan based on the time value of money with 0 points.ĭouble check what the lender tells you. So avoid the rule of 78’s and up-front “points”. For car and house loans people change their mind every 3 to 5 years. When we get married we think it will be forever. Again if you pay off early, you paid too much. The charge what are called points up-front, which is really just prepaid interest. Mortgage lenders who make long-term loans (20-30 years) are more up-front about it. Now the rule of 78’s in not this extreme, but you get the idea. You would have paid $6,800 interest plus the original $10,000 loan for a total of $16,800 instead of $4,000 interest (based on the time value of money) plus the original $10.000 or $14,000. What if the beginning payments were all interest until all the interest was paid after which you started paying off the amount you borrowed? At the end of 3 year you have paid off all the interest now you can start paying of the loan. The reason that the interest cost declines is that as you make payments the amount borrowed becomes less making the interest owed less. At first a little over half the payment is interest ($100 approx.) declining over 7 years of the loan to the last payment where the interest component is $0. Normally based on the time value of money a part of each payment is interest. Here is an example: You borrow 10,000 and your payment is $200. If all the first payments are interest and you payoff the loan early, you will pay the full amount you borrowed plus interest that never accrued. Meaning you pay more interest at the beginning of the loan than the time value of money would require. The rule of 78s is different way of calculating interest in each payment. Many reputable lenders cheat, they use a method, which prior to 1940, was only used by loan sharks, called the rule of 78's. The interest rate here has a name, it's called the APR (annual percentage rate), this reflects the real time value of money. Getting a loan? Compute and manipulate the numbers to your advantage.
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