|The Car Dealer's Retail Installment Contract|
Most car loans that are offered at new car dealerships are written as a retail installment contracts. These contracts have equal scheduled monthly payments. At the end of the payments the lender will release the borrowed collateral to the customer.
These payments are calculated using simple interest. Which means the interest on the loan is calculated on the declining balance. You will need a car loan calculator to accurately determine your payment. In other words, the more you owe on the vehicle, a larger percentage of the monthly payment is going to pay the finance charge.
Here is the payment formula:
Simple interest has its benefits because if the customer pays more than their scheduled payment, that overage is applied directly to the principal of the loan. for example, if a customer's monthly payment is $300 and they pay $350, that overage of $50 will directly be applied to the principal balance on the loan and not to the interest. This does not mean that the payments will be adjusted; it means that the Term of the loan will be shortened.
Because simple interest is calculated in this way, a customer can consider longer term auto loans to achieve a low monthly payment and also allow them the option to pay it off in a shorter term.
For instance, a five year, $20,000 car loan at 7% interest will produce a payment of $406 per month. A monthly payment for the same amount for four years is $479 per month. In this scenario, the customer can agree to the 60 month loan and their payment will only be $406, but if they paid $479 every month they would pay it off in exactly four years.
On a retail installment contract, the APR(Annual Percentage Rate), Finance Charge, Amount Financed, Total of Payments, Total Sale Price, Number of Payments and Monthly Payments will be printed in a “truth in lending” box on the loan document. All new car dealers will adhere to these federal lending laws.
Example of Truth in Lending Disclosure:
The important peripheral items a customer must look for would be the “extras” that could have been added on to loan without the dealer’s disclosure. These are found under the “Itemization of Amount financed” just below the “truth in lending” disclosures. This column will detail the rebates, down payment and trade-in amounts. Also, it will itemize “LA&H” insurances , Extended Warranties and Service Agreements . Customers must make sure there isn't mystery charges listed in this column.
|< Prev||Next >|