Car finance question.

[blue-eye-boy]

My dad bought a Volkswagen Caddy maxi Life beginning of this year. The invoice amount if I recall correct was R 250 000. He gave a R50 000 deposit, so if I'm correct his finance amount was R200 000. The deal the did was on a 61 month period (dunno why not 54 months). So now he got some extra money, and he decided to pay that off this finance. Now he tells me it is possible to pay R 100 000 off the capital, and choose to keep the monthly instalment the same, and let them just reduce the finance period, to say 45 months or whatever.

I'm not on the ball with all the details of this deal, but we were just talking about this the weekend, and I wondered what the financial guru's would say?

Now is that possible, and is it even possible to choose what you want, shorter term or lower instalment?

I also thought it's a good idea to "invest" that money into this. Am I right here? Thanks for the input.

 

[Freshy-ZN]

Theres two ways paying a large amount into your finance agreement can be used.
The first is to capitalise on interest where you pay less per month but the length of the agreement stays the same and secondly to capitalise on term where you continue to pay the same amount per month but for less months.

If you have extra money it is probably better to put it towards paying off your loan than investing it as the interest rate your loan is calculated on is likely to be higher than the interest you would earn on investments.

So you might be earning say 9% on an investment and paying 12% on a loan which is silly. So pay off loans rather than invest. Obviously investing to have an emergency fund for example is also a good idea.

 

[Carbon_Fibre]

Theres two ways paying a large amount into your finance agreement can be used.
The first is to capitalise on interest where you pay less per month but the length of the agreement stays the same and secondly to capitalise on term where you continue to pay the same amount per month but for less months.

If you have extra money it is probably better to put it towards paying off your loan than investing it as the interest rate your loan is calculated on is likely to be higher than the interest you would earn on investments.

So you might be earning say 9% on an investment and paying 12% on a loan which is silly. So pay off loans rather than invest. Obviously investing to have an emergency fund for example is also a good idea.

+1

 

[Carbon_Fibre]

On all my past vehicle installment sale agreements, the banks have added the capital amount borrowed plus interest on the entire period. Then they divide this amount by the finance term and calculate the repayment. So if you choose to settle early, it doesn't benefit you as they've already charged interest over the full term and settlement discounts are negligible (in my experience).

Do all banks do it this way? Is there another bank or another type of finance agreement which doesn't penalise early settlement?

I know home loans aren't calculated like this. Why are Vehicle Installment Sales done this way?

 

[supersunbird]

On all my past vehicle installment sale agreements, the banks have added the capital amount borrowed plus interest on the entire period. Then they divide this amount by the finance term and calculate the repayment. So if you choose to settle early, it doesn't benefit you as they've already charged interest over the full term and settlement discounts are negligible (in my experience).

Do all banks do it this way? Is there another bank or another type of finance agreement which doesn't penalise early settlement?

I know home loans aren't calculated like this. Why are Vehicle Installment Sales done this way?

What you describe is only if on fixed interest rate... and even then you would save by early settlement. Say you are on 60 months paying R2400 (half on capital amount/ half interest), then on month 40 you settle and that means you save paying interest (R1200) over the next 20 months...

 

[Pyro]

On all my past vehicle installment sale agreements, the banks have added the capital amount borrowed plus interest on the entire period. Then they divide this amount by the finance term and calculate the repayment. So if you choose to settle early, it doesn't benefit you as they've already charged interest over the full term and settlement discounts are negligible (in my experience).

Do all banks do it this way? Is there another bank or another type of finance agreement which doesn't penalise early settlement?

I know home loans aren't calculated like this. Why are Vehicle Installment Sales done this way?

The NCA should have changed this behaviour. You must arrange before you settle your account to avoid penalties, and you'll probably have to arrange to have your monthly payment changed, but you can still decide if you want to pay less or pay over a shorter time.

 

[Carbon_Fibre]

What you describe is only if on fixed interest rate... and even then you would save by early settlement. Say you are on 60 months paying R2400 (half on capital amount/ half interest), then on month 40 you settle and that means you save paying interest (R1200) over the next 20 months...

Nope all were variable rates. Absa for 1. BMW Finance for 2.