Vehicle Finance

[>Reaper<]

Hi

I currently have vehicle finance with Wesbank and recently came across capital reductions. I have some extra cash now so I can continue to make extra payments every month.

However, I understand there are two options:
1. Reducing your term
2. Reducing your monthly installment

So lets say my installment is 100, if i reduce my monthly installment and the new installment becomes 95, I would still pay the 100 and the extra 5 would go into the advance amounts.

Is this better than reducing the term?

Which of the above two would be the better way to go?

Regards,

 

[Roo!]

Psychologically, reducing the monthly amount is better. The more you pay extra the lest you pay, which means the more you pay extra...

 

[>Reaper<]

Psychologically, reducing the monthly amount is better. The more you pay extra the lest you pay, which means the more you pay extra...

You said "Psychologically"... hahaha. Okay so:

Scenario 1: Installment is 100, I pay 110 every month and reduce the installment but keep paying 110 every month.

Scenario 2: Installment is 100, I pay 110 every month and reduce the term but keep paying 110 every month.

In the end, would both scenarios be the same thing financially?
I get why Psychologically the first one would seem better.

 

[Sinbad]

Hi

I currently have vehicle finance with Wesbank and recently came across capital reductions. I have some extra cash now so I can continue to make extra payments every month.

However, I understand there are two options:
1. Reducing your term
2. Reducing your monthly installment

So lets say my installment is 100, if i reduce my monthly installment and the new installment becomes 95, I would still pay the 100 and the extra 5 would go into the advance amounts.

Is this better than reducing the term?

Which of the above two would be the better way to go?

Regards,

Both your above methods would have the same effect.
The difference being, if you reduced the term instead of the installment you'd be locked into the higher repayment - whereas if you reduce the installment your monthly commitment is lower.

 

[>Reaper<]

Both your above methods would have the same effect.
The difference being, if you reduced the term instead of the installment you'd be locked into the higher repayment - whereas if you reduce the installment your monthly commitment is lower.

Cool... Thanks a lot! This is the stuff that should be taught at school! lol

 

[Forza]

Cool... Thanks a lot! This is the stuff that should be taught at school! lol

Only if the "extra" cash will always be available and you willing to pay the extra for the duration of the finance period then reduce the monthly commitment because you will save in interest at the end.

But if the "extra" cash is only available for an interim period then request a reduced monthly instalment over the reaming finance period or continue paying your current instalment although your monthly instalments has reduced

 

[Splinter]

Am I losing my mind? Reducing the installment would by default mean less capital is paid off, increasing the term of the loan and effectively adding to the overall amount to be paid?

 

[>Reaper<]

Only if the "extra" cash will always be available and you willing to pay the extra for the duration of the finance period then reduce the monthly commitment because you will save in interest at the end.

But if the "extra" cash is only available for an interim period then request a reduced monthly instalment over the reaming finance period or continue paying your current instalment although your monthly instalments has reduced

The extra cash will always be available. I plan to have it go off automatically each month. Thanks for this. really helps

 

[SauRoNZA]

Am I losing my mind? Reducing the installment would by default mean less capital is paid off, increasing the term of the loan and effectively adding to the overall amount to be paid?

Yes but that's only if you pay it according to the reduced instalment.

The idea here is not the reduce the actual payment towards the instalment, but just have the instalment reduce on their "required payment" side.

In the case of Wesbank they "virtualize" this anyway by keeping an advance amount in the account and subtracting that from the capital so it appears less and then work out the interest on that and and rebate it every month. Weird system.

MFC previously just recalculated my entire term and kept the instalment the same again so had none of this showing on the statement every month.

It gets confusing as you think the advance amount directly subtracts from the capital...but it's already been subtracted.

 

[SauRoNZA]

Only if the "extra" cash will always be available and you willing to pay the extra for the duration of the finance period then reduce the monthly commitment because you will save in interest at the end.

But if the "extra" cash is only available for an interim period then request a reduced monthly instalment over the reaming finance period or continue paying your current instalment although your monthly instalments has reduced

Well at the same time the advance amount does indirectly shorten the loan term either way as it nullifies the the capital balance long before the end of the term and then you simply settle it with the money in the advance amount.

My bike for instance is automatically settled month after next, after 2 1/2 or so years into a 54 month term.

 

[Splinter]

Yes but that's only if you pay it according to the reduced instalment.

The idea here is not the reduce the actual payment towards the instalment, but just have the instalment reduce on their "required payment" side.

In the case of Wesbank they "virtualize" this anyway by keeping an advance amount in the account and subtracting that from the capital so it appears less and then work out the interest on that and and rebate it every month. Weird system.

MFC previously just recalculated my entire term and kept the instalment the same again so had none of this showing on the statement every month.

It gets confusing as you think the advance amount directly subtracts from the capital...but it's already been subtracted.

ok. The example given did not reflect this.

Anyway, it's all marketing hocus pocus - you simply pay more and your term reduces as well as total interest paid.

 

[>Reaper<]

ok. The example given did not reflect this.

Anyway, it's all marketing hocus pocus - you simply pay more and your term reduces as well as total interest paid.

Makes sense... Thanks guys!

 

[bassplayer]

Dont reduce the term or the installment. Pay more than the installment amount each month, eg, instead of paying the installment of R2000 a month pay R2300 a month. On top of that, when you have some extra funds available, you could make a bulk payment as well,eg, R5000. This way you always stay ahead of the game. The nice thing about paying extra each month, is that eventually you will be a few installments ahead. This helps if you hit a rough patch, as most banks/finance houses will allow you a "payment holiday" if you are having a bad month.

Another advantage of paying a bit extra and not reducing the term, is that it will improve your credit record. It looks good to creditors/banks when you have paid a 60 month vehicle loan off in just 48 months. This could mean the difference between getting a bad interest rate or a good one when applying for a homeloan.

 

[SauRoNZA]

Dont reduce the term or the installment. Pay more than the installment amount each month, eg, instead of paying the installment of R2000 a month pay R2300 a month. On top of that, when you have some extra funds available, you could make a bulk payment as well,eg, R5000. This way you always stay ahead of the game. The nice thing about paying extra each month, is that eventually you will be a few installments ahead. This helps if you hit a rough patch, as most banks/finance houses will allow you a "payment holiday" if you are having a bad month.

Another advantage of paying a bit extra and not reducing the term, is that it will improve your credit record. It looks good to creditors/banks when you have paid a 60 month vehicle loan off in just 48 months. This could mean the difference between getting a bad interest rate or a good one when applying for a homeloan.

By paying more you ARE reducing the loan term.

That's the default for paying more.

Anything else would require special recalculation to reduce the instalment and that's usually by request.

Like I explained paying more goes and sits in your "advance amount" and then your interest gets rebated every month (because the capital balance is reduced and not linking to the original agreed amount).

If you keep doing this then you settle early automatically...ergo the loan term is reduced.

 

[whatwhat]

People really need to spend some time learning about investments and compound interest.

These questions are answered by calculations.

 

[>Reaper<]

People really need to spend some time learning about investments and compound interest.

These questions are answered by calculations.

I have no issue with trying to learn about it, that's why I created this thread. I been using google and this forum so far to learn about it but if you know of any material I can look at such as books/courses I can look at, please let me know.

Thanks!

 

[bassplayer]

By paying more you ARE reducing the loan term.

That's the default for paying more.

Anything else would require special recalculation to reduce the instalment and that's usually by request.

Like I explained paying more goes and sits in your "advance amount" and then your interest gets rebated every month (because the capital balance is reduced and not linking to the original agreed amount).

If you keep doing this then you settle early automatically...ergo the loan term is reduced.

I agree with what you are saying, but you can also contact the bank and ask them not to reduce your installment amount.

 

[SauRoNZA]

I agree with what you are saying, but you can also contact the bank and ask them not to reduce your installment amount.

Yes that is the default behaviour I'm referring to.

The re-calculation of instalment is by request normally.