Paying off vehicle early

[TheJman]

Apologies for my ignorance. So, for it to work in my interest, I have to instruct them in writing to do the following:

1. Allocate the additional payments
2. Allocate it specifically to the capital portion of the loan.

Is that correct?

Thanks

The problem with giving advice on this is that it depends on how the specific bank calculates interest on your debt. Interestingly, I've found that some banks have a different mechanism or calculation depending on whether it is a home loan or asset finance.

My vehicle finance functioned as follows:

Option1:

Any amount I paid in over an above my monthly instalment was coded as "available amount", which was available for redrawing (I don't want to get too complicated here, but just to state, the amount available for redraw was reduced each month as the loan amortised down)

The interest on my loan was calculated by deducting the "available amount" from the total amount outstanding (For example, if my outstanding balance was R100k, and I put in an extra R10k, they calculated the interest on R90k).

My monthly instalment remained the same, but a higher amount of my instalment was allocated to capital outstanding (as the interest amount was obviously lower).

In this way, I paid off my loan quicker as each month, more was being applied to capital, which thereby reduced my interest each month - opposite of a vicious cycle

Option 2:

If I had called in and asked them to "capitalise" my additional payments, then that amount will no longer be available for drawdown, but my monthly instalment will be reduced. So in this case, the term of my loan will remain the same as they basically recalculate the instalment each time I "capitalise" amounts to the loan, to ensure that I pay less to amort the loan down to R0 (or an agreed residual).

So:

• option 1 above - instalment remained the same, but I pay the loan off quicker

• option 2 above - instalment reduces, but I will keep paying for the rest of the term (obviously unless I settle the whole amount before that period).

It all depends on your cash flows and monthly budget.

 

[Candystore]

OP here. I emailed the bank and asked to increase the minimum installment and apply it to the capital portion. This is their response:

"Please note any additional/ lump sum payments are always deducted off of the outstanding capital; there are two options thereafter, to reduce the term of the contract or the installment amount.

Please contact the AVAF department after making payment as the option you would like needs to be indicated to them."

What is meant by the highlighted portion of their response? In my mind, because I increased the installment, does it not automatically reduce the term? Why is reducing the installment amount an option? I just increased it, why would I now reduce it? Not following their logic.

 

[bromster]

OP here. I emailed the bank and asked to increase the minimum installment and apply it to the capital portion. This is their response:

"Please note any additional/ lump sum payments are always deducted off of the outstanding capital; there are two options thereafter, to reduce the term of the contract or the installment amount.

Please contact the AVAF department after making payment as the option you would like needs to be indicated to them."

What is meant by the highlighted portion of their response? In my mind, because I increased the installment, does it not automatically reduce the term? Why is reducing the installment amount an option? I just increased it, why would I now reduce it? Not following their logic.

This.

Just do the eft and everything is pretty much automatic nowadays.

 

[ShaunyCT]

OP here. I emailed the bank and asked to increase the minimum installment and apply it to the capital portion. This is their response:

"Please note any additional/ lump sum payments are always deducted off of the outstanding capital; there are two options thereafter, to reduce the term of the contract or the installment amount.

Please contact the AVAF department after making payment as the option you would like needs to be indicated to them."

What is meant by the highlighted portion of their response? In my mind, because I increased the installment, does it not automatically reduce the term? Why is reducing the installment amount an option? I just increased it, why would I now reduce it? Not following their logic.

If you reduce the term of the contract then your instalment will increase.

I would just pay the extra funds into the account while I can, because I don't know if my financial circumstances might deteriorate in the future. ... but that's just me who loves being paranoid.

 

[Candystore]

This.

Just do the eft and everything is pretty much automatic nowadays.

It is a monthly debit order. They already agreed to increase it per my request.

My question remains though - what does this mean: Please note any additional/ lump sum payments are always deducted off of the outstanding capital; there are two options thereafter, to reduce the term of the contract or the installment amount?

 

[Speedster]

It is a monthly debit order. They already agreed to increase it per my request.

My question remains though - what does this mean: Please note any additional/ lump sum payments are always deducted off of the outstanding capital; there are two options thereafter, to reduce the term of the contract or the installment amount?

Additional payments mean you owe them less. You can choose to pay less each month (and keep the remaining term the same), or you can keep paying the same and have less payments remaining.

 

[TheJman]

OP here. I emailed the bank and asked to increase the minimum installment and apply it to the capital portion. This is their response:

"Please note any additional/ lump sum payments are always deducted off of the outstanding capital; there are two options thereafter, to reduce the term of the contract or the installment amount.

Please contact the AVAF department after making payment as the option you would like needs to be indicated to them."

What is meant by the highlighted portion of their response? In my mind, because I increased the installment, does it not automatically reduce the term? Why is reducing the installment amount an option? I just increased it, why would I now reduce it? Not following their logic.

So it will reduce the term, but it won't show on the system - you will just end up paying off the loan sooner than the term (because you're putting more in each month).

If you capitalise the additional payment, then the bank recalculates your monthly instalment based on the lower capital amount, so your term stays the same, and in order to do this.

A lot of people are struggling with cash flow at the moment and are trying to reduce their monthly expenses, so they want a lower instalment.

Agreed though, if you've asked to increase your monthly min installment, they should have realised you don't want to lower your installment

 

[Candystore]

So it will reduce the term, but it won't show on the system - you will just end up paying off the loan sooner than the term (because you're putting more in each month).

If you capitalise the additional payment, then the bank recalculates your monthly instalment based on the lower capital amount, so your term stays the same, and in order to do this.

A lot of people are struggling with cash flow at the moment and are trying to reduce their monthly expenses, so they want a lower instalment.

Agreed though, if you've asked to increase your monthly min installment, they should have realised you don't want to lower your installment

Ahhh, so when they say "... there are two options thereafter, to reduce the term of the contract or the installment amount.", they mean should my financial circumstances change at some time in the future, I can exercise one of those options?

 

[TheJman]

Ahhh, so when they say "... there are two options thereafter, to reduce the term of the contract or the installment amount.", they mean should my financial circumstances change at some time in the future, I can exercise one of those options?

Depending on the bank, you should be able to capitalize your "advance payments" at any time - meaning that the amounts you have paid in addition to your monthly instalments (that are available for drawdown) will no longer be available for drawdown, which will then mean the bank will recalculate your monthly instalment based on the lower capital balance - which will result in your monthly instalments being lower (but the term of your loan remaining the same).

 

[derp90]

I want to settle my vehicle loan with Wesbank. It was under 250k so there are no penalties that I'm aware of.

I can choose the effective date when I request a settlement letter. Does this affect anything in any meaningful way? I requested it for 30 November.

I see in the settlement letter it states:

Should you make payment of the Settlement Amount prior to 2023/11/30, you will not receive a refund of any interest that may be due to you.

Is the idea that I should wait until it's closer to that date to pay?

 

[rh1]

Are their any legal/bank fundi's, AFAIK, they have to deduct any additional payments against capital.They dont have a choice.

WRT. How interest is calculated, depends on your contract.

There is nothing difficult to calculate, you can use excel to determine how much you will save by paying in extra.

 

[derp90]

I get some interest rebate monthly - I'm guessing this is related to the extra I have paid in. I wouldn't want to lose out on one because I settle too early.

 

[SauRoNZA]

I want to settle my vehicle loan with Wesbank. It was under 250k so there are no penalties that I'm aware of.

I can choose the effective date when I request a settlement letter. Does this affect anything in any meaningful way? I requested it for 30 November.

I see in the settlement letter it states:

Should you make payment of the Settlement Amount prior to 2023/11/30, you will not receive a refund of any interest that may be due to you.

Is the idea that I should wait until it's closer to that date to pay?

Basically just make sure your debit order won’t **** with it.

I’d settle in the middle of the month rather.

 

[SauRoNZA]

I get some interest rebate monthly - I'm guessing this is related to the extra I have paid in. I wouldn't want to lose out on one because I settle too early.

It’s just the reduction outside of your agreed payment terms against what you’ve over paid.

 

[RiaX]

If you having monthly budget issues then inject savings into it else leave it.

I've never understood why people settle vehicles quickly. Your installment shouldn't put strain on your budget. If it does you financed an unaffordable asset.

Sure you save/pay less over time however the way I see it is if you buy a vehicle say for a million rand (which isn't much these days in terms of cars) you converted a capital building asset into a depreciating asset.

R1 000 000 in a bank can get you approximately R90 000 per annum just leaving it in the bank. How long would it take you to rebuild that sum ?

What I personally do is I pause savings and inject as much as I can into the loan account bringing the installments downs until it reaches a point where it doesn't bother me. At which point I redirect into build new revenue streams.