Financing Issue(s) getting financed?

[fishheadbob]

Uhmm.... Now I'm curious..

Show of hands: Do some people think it's bad form to pay off your loans early? A stab in the back to the financier?

It has NEVER occurred to me that if I owe somebody money and pay it off early that somehow this is an offense.

They've got their money and can now invest it and make what they would of earned in interest. Or they can loan it out again.
Or they can roll around in it in a big pile on their bed. Whatever...

If they invest it they should be able to make as much money as the interest. Plus now they have the benefit of being in possession of the principle / security.

Plus if you pay them off with future dollars (i.e over the life span of the loan), you're paying them off with dollars that are worth less than paying them off with today's dollars. (i.e. due to inflation). So there's a benefit to them.


Interested in what others think..

Loans are usually front loaded. What that means is that the earliest payments are mostly interest payments with only a small amount going to principal. As more payments are made the interest portion gets smaller and more of the payment goes to reducing the principal.
Consider a 20 year mortgage: if a person had made payments on a 7% loan for ten years, then decided to refinance at 5% for 10 years that person would have paid back more, in many cases, than if he had just continued paying off the original 7% mortgage . Why ? He started over and had more interest to pay off. Ask a lot of questions when getting financed. Remember that the F&I guy was once a very good used car salesman working on what he sold, which ain't the same as what's good for you.

 

[smstonypoint]

I believe (and I don't know all the details) if you finance thru the dealership and immediately refinance the dealership may lose any incentive they received for the financing.
In my case I received an additional rebate for financing thru the manufacturer. I knew my salesman and he asked me to make a couple of payments before refinancing because otherwise the dealership would be charged back for the incentive I received.
We don't need to hash out the pros or cons of this again, just explaining what I think they meant about being courteous to your dealer.

I had a similar experience. I had negotiated a cash sales price for a new 2007 Pilot when the sales lady informed me that I was eligible for a $500 rebate if I financed through Honda. After conversations with the finance manager and assuring myself that there was no prepayment penalty, I financed $5,000. I paid the loan off in about three months.

Steve

 

[LD1]

Loans are usually front loaded. What that means is that the earliest payments are mostly interest payments with only a small amount going to principal. As more payments are made the interest portion gets smaller and more of the payment goes to reducing the principal.
Consider a 20 year mortgage: if a person had made payments on a 7% loan for ten years, then decided to refinance at 5% for 10 years that person would have paid back more, in many cases, than if he had just continued paying off the original 7% mortgage . Why ? He started over and had more interest to pay off. Ask a lot of questions when getting financed. Remember that the F&I guy was once a very good used car salesman working on what he sold, which ain't the same as what's good for you.

False.

Example only holds true if the money it costs to refinance is rolled back into the loan.

At the 10 year mark of a 20yr / 7% loan....the principal is going to be X.

If you refinance for 10 years at 5%....as long as you are only financing x and not adding back in closing cost, you will certainly save money with a refi.

It's not rocket science or voodo. It's basic interest. Which is a percent. So it makes sense while the principal balance is higher, you pay more interest in terms of dollars. But from the first payment to the last payment, the interest is the exact same percentage of the principal.

So a bogus example.

 

[smstonypoint]

False.

Example only holds true if the money it costs to refinance is rolled back into the loan.

At the 10 year mark of a 20yr / 7% loan....the principal is going to be X.

If you refinance for 10 years at 5%....as long as you are only financing x and not adding back in closing cost, you will certainly save money with a refi.

It's not rocket science or voodo. It's basic interest. Which is a percent. So it makes sense while the principal balance is higher, you pay more interest in terms of dollars. But from the first payment to the last payment, the interest is the exact same percentage of the principal.

So a bogus example.

Exactly.

You beat me to it, but I was working up a specific example.

Suppose that the original loan is for $100,000 with 7% annual interest for 240 months. The monthly payment is $775.30, and at the end of 10 years the principal balance is $66,773.67. Suppose you refinance that balance at 5% for 10 years. The monthly payment is $708.24. I am ignoring any transaction costs (appraisal, closing costs, etc.).

Steve

 

[mile9c1]

I've never heard of a loan that had "front loaded" interest. I've heard of people accidentally pre-paying interest when trying to pay down principal (doh).

 

[buckeyefarmer]

Not really front loaded interest, but simply how interest works. Interest is calculated based on the principal, which is obviously highest at the beginning, so more (most) of your payment at the beginning of a loan is interest. That's why its important to pay down principal early if you can.
I paid extra principal on my mortgage for sevaral yrs, then refi'd to a 15 yr mortgage at even lower rate, then kept my previous payment amount and paid off my mortgage early, saving a lot in interest over my original mortgage.

 

[LD1]

I can see why people think interest is front loaded. Because from a dollar standpoint, it is. But it certainly isn't some conspiracy against the borrower or anything. Like you said, just how interest works.

Exactly.

You beat me to it, but I was working up a specific example.

Suppose that the original loan is for $100,000 with 7% annual interest for 240 months. The monthly payment is $775.30, and at the end of 10 years the principal balance is $66,773.67. Suppose you refinance that balance at 5% for 10 years. The monthly payment is $708.24. I am ignoring any transaction costs (appraisal, closing costs, etc.).

Steve

On my phone, so it was hard to figure up a specific example.

I "think" what fishheadbob was trying to get at is that depending on all the factors, sometimes a lower interest can work against you.

If the principal is lower (later in the loans life), and the change in interest isn't huge, like a quarter or half of a percent, the potential refi fees and closing may exceed the savings of the lesser interest rate.

I had this exact same discussion with a pushy mortgage broker back when I actually had a mortgage.

I don't remember the specifics, but I had around 10 years left to pay on the 15 year loan, and got one of them refi offers in the mail guaranteeing they can save me money by lowering my interest. Which they were offering 1/2 or 3/4% less than I was currently fixed at.

All figured, they could save me about $20 a month. Over 10 years (120 payments) that would have been about $2400. But would have cost me $3000 or so do process the refi.

Then they offered me a 15 year loan at the same interest (again something like 3/4% less than I was currently at) and could roll the $3000 back into the loan and really save me a ton of money. Something like $100 a month. (Don't remember the exact). I told him he was full of bull, and asked what my payment would be.

The number he gave me times the 180 payments to be made was several thousand MORE than my current x 120 remaining payments.

He was baffled why anyone would want to pay "such a high interest rate" when they could give me such a low rate.

Wonder how many people actually fall for that crap without actually putting pen to paper?

 

[buckeyefarmer]

Yep, good point, sometimes it don't pay to refi, especially near the end.

 

[ovrszd]

I believe (and I don't know all the details) if you finance thru the dealership and immediately refinance the dealership may lose any incentive they received for the financing.
In my case I received an additional rebate for financing thru the manufacturer. I knew my salesman and he asked me to make a couple of payments before refinancing because otherwise the dealership would be charged back for the incentive I received.
We don't need to hash out the pros or cons of this again, just explaining what I think they meant about being courteous to your dealer.

Yep....

 

[ovrszd]

I had a similar experience. I had negotiated a cash sales price for a new 2007 Pilot when the sales lady informed me that I was eligible for a $500 rebate if I financed through Honda. After conversations with the finance manager and assuring myself that there was no prepayment penalty, I financed $5,000. I paid the loan off in about three months.

Steve

I see nothing wrong with that. In fact you were well served by her to inform you of this option. It did nothing to hurt the bottom line of her or the dealership.