My girlfriend bought a car, and financed it. We’re looking at paying off the balance, and the contract says “the prepayment will be deemed to be the Sum of the Periodic Time Balances.” I’ve googled the phrase, but it hasn’t shown anything helpful in calculating how much interest we would save. The original loan was for $9000, $7000 is paid off, the interest rate was 24.5%, and the payment plan is $250 a month. And yes, I am aware how terrible her loan is.
If anyone has a link to a source explaining this, it would be helpful, as the dealer has already “helpfully” suggested that they’d take off $250 if we paid it all off now, and I suspect the savings would be greater
Sounds like it’s a “rule of 78s” loan. Basically, the interest is already pre-computed and included in the balance as opposed to calculated every month like in a normal simple interest loan. Just paying off the balance saves you nothing because the total interest is already in there. I think the “sum of periodic time balances” verbiage just means that to pay the loan off early, you have to bring them the amount of money equal to what the remaining monthly payments would be. They’re then required(*) to pay you back the “unearned interest” which they calculate using the rule of 78’s.
The problem with these loans (and the reason why the sorts of scummy lenders who issue 25% car loans love them) is that it makes the portion of the payment being applied to interest much higher in the early payments and lower in the later payments than it would be with a regular simple interest loan. So prepaying the loan saves you a lot less money. At this late stage, the unearned interest probably isn’t going to be a lot. If you punch in “rule of 78s calculator” into Google you should get a few that’ll do the equation in the wiki page automatically for you. You’ll need to know the term of the loan. It might just be easier to call the lender and ask them to run the numbers assuming paying the loan off today and then simply compare it to the total of all the remaining payments.
So, yeah, it’s a terrible loan. Rule of 78s loans used to be common because it was easier to do the math back before computers, but predatory lenders have latched on the higher prepayment costs as a feature instead of the bug it originally was. A lot of states ban them altogether, but unfortunately not all of them yet.
(* at least I think they’re required and can’t just force you to pay all the interest. Although some of these loans also have hefty early payment penalties.)
I have a credit card from a major US bank that charges 27.99% APR. I seriously doubt that’s illegal. The line between what’s legal and what isn’t probably depends on what state you’re in. Here in Oregon, it’s illegal for a person to loan another person less than $50,000 at an interest rate higher than either the 90-day Federal Reserve rate plus 5%, or 12%, whichever is higher. BUT banks are specifically exempted from that law. I can’t find a cite for what the maximum is for banks.
I have a hunch that the OP’s loan is basically saying that they aren’t calculating interest in the standard way and you won’t save much (or maybe won’t save anything at all) by paying it off early.