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I recently took out a loan in order to buy a car for work.

The contract is over a five year term, with a total of 60 monthly repayments, at an interest rate of 13% pa.

The way the lender wants me to repay the loan is to make 60 payments of $485 (it turns out each payment incurs a $10 administration fee).

My initial instinct was to pay as much as I can afford each month in order to reduce my total interest payments. However there is a clause in the contract that attracts an early repayment fee, calculated as follows:

An Early Termination Fee ... is:
i) $750 if the Amount of Credit exceeds $12000; or
ii) otherwise, 6.25% of the Amount of Credit,
and thereafter the amount of the fee is that amount multiplied by the number of unexpired whole months in the term at the time the contract is paid out divided by the number of whole months in the term.

As I write this I have a credit of $21000 (rounded up for simplicity), and 60 months left on the contract.

My question is what is my best strategy for repaying this loan, that is the cheapest to me in the long run? (Also assume this is the lowest interest rate I can get, my credit score isn't great, I've been told by the lender that I should talk to them about refinancing once I have more payslips as evidence of income...in 6 months time).

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    Wow. That is a horrific deal even for someone with bad credit. Refinance won't help you if you have an early termination clause on the loan, Refinancing would still mean you need to pay that fee.
    – JohnFx
    Jun 21 at 1:31
  • Yeah, tell me about it.... And yeah after reading the clause it seams you are right. I guess I need to crunch the numbers, but it seams so far that actually paying back at the rate they want may be in my best interest. Jun 21 at 4:20
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Since $750 is 6.25% of $12000, I think that $750 is the max amount which is multiplied by the number of remaining months. IOW, if you have 60 months remaining, you'd owe $750 * 60 = $45000. That's insane.

OTOH, 60 months of $485 is "only" $29,100.

my credit score isn't great,

I've been told by the lender that I should talk to them about refinancing once I have more payslips as evidence of income...in 6 months time

The lender gave you the answer to your question: they'll reduce the rate once you prove to them that you are

  1. stable (can hold down a job), and
  2. reliable (meaning pay your bills on time).
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  • So assuming that I can't refinance for the moment,just paying the $485 installments on time is the best strategy then? Jun 21 at 7:27
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    I think that you've overstated the Early Termination Fee. It looks to me as if the Early Termination Fee would be $750 x 60 / 60 = $750 (and of course Andrew would have to pay out the remaining loan balance in order to terminate early). But the Early Termination clause is a bit ambiguous, so it would definitely be worth asking the lender to give a quotation on the payout value of the loan. Jun 21 at 8:42
  • @GregSchmidt "/ 60" you might be right. It's definitely designed to confuse.
    – RonJohn
    Jun 21 at 13:08
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    @AndrewMicallef yes, I think that's the best course (even though Greg Schmidt raised a valid point). Your credit score is low, so you're risky. Sit tight for six months, and then look for a better deal.
    – RonJohn
    Jun 21 at 13:10
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If $750 is the maximum early termination fee, (if I've read it right), you could shop around to refinance the loan.

Take the loan agreement to a local credit union and see if they can do a lot better, to the point where they save you a lot more than $750.

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  • Given that $750 is 6.25% of $12000, I think that $750 is the max which is multiplied by the number of remaining months. IOW, $750 * 60 = $45000.
    – RonJohn
    Jun 21 at 6:09
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    @RonJohn -- it's multiplied by the remaining number of months, then divided by "the number of whole months in the term". Jun 21 at 12:58
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    @RonJohn In other words, if you pay the whole loan right at the beginning, the fee is $750 (=750 * 60 / 60). If you pay it off after 20 months it will be $500 (=750 * 40 / 60) etc. At least, that's how I read it...
    – TripeHound
    Jun 21 at 13:07

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