Simple Interest Loans/ Simply Put
By Cornelia Amiri
Before you zip off in your brand new, 2004 dream machine, you’ll sign on the dotted line. You test-drove the car, but how closely did you read the contract. Most automobile loans are simple interest, a loan that charges interest daily. You pay interest from the day the contract is signed to the day the lender receives the payoff. You financial institution may have a grace period on late fees, but not on interest. To save interest, pay the loan off as fast you can.
Before signing the contract, read it, and make sure you understand. Check to see if the interest is fixed or variable. Fixed means the interest rate will remain the same during the entire period of the loan. Variable means the interest rate is based on prime. If prime goes up, you will pay more.
Principle is the amount you borrowed from the lender. Interest is the lender’s fee and is calculated on a percentage of the principle. When the principle it at it's highest, as in the beginning of the loan, the amount of interest will be more. Try to pay as much up front as you can. That way more of your money will go to the principle, so you will save on interest.
At anytime, you can request a payment history from your lender to compare with your own records. This will also show a break down of principal and interest. You can make interest only payments in addition to regular scheduled payments. Call your financier to find out the requirements. There is usually a minimum dollar amount and your account must be current.
Check to see if your financier charges late fees. Try to mail your payments ten days ahead of the due date or make your payments in person. If you are unjustly charged a late fee, call your lender and have them wave it.
Financiers offer one-month deferments during Christmas and summer. But do not accept the extension unless you absolutely have to. Interest will accumulate during the extra days so you will pay more.
Some loans have force-placed insurance, which means that if your car insurance is canceled the finance company will automatically insure the vehicle, and add the cost to your loan. Force-placed insurance is considerably higher than average insurance.
If you and your spouse sign the contract together or if he signs alone, there are unfortunate possibilities you need to consider. The person who signs the top line will be the main borrower. Lurking in the dusty cubicles of loan customer service departments are horror stories of separated husband and wives stealing cars back and forth from each other. Divorced are separated individuals sometimes call in after they made the pay off to unexpectedly find out that the title was sent to the ex-spouse, who was the man borrower. The financier is obligated by the contract to send the title directly to the main borrower unless a dealership or other financial institution makes the payoff. Then it is sent to that company. That would happen in the case of a refinance. However there are a few states in which financiers do not hold titles. In those states the main borrowers have the titles and the lenders only have liens on the vehicles. The liens are released upon payoff.
It is in a borrower's best interest to watch their loans as closely as possible. The verbiage on an auto-loan contract is anything but simple. Yet with a basic understanding of simple interest loans, you’re in for a smooth ride.
