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Section 8

Motor Vehicle Financing


8.2 Computing Interest Rates

  1. There are two permissible methods for computing interest rates, the Simple-Interest Basis, or the Pre-computed Basis method.
    1. Simple-Interest Basis:
      1. Apply the constant rate to the unpaid balance as it changes from time to time.
      2. Simple interest basis must be used if the payment schedule is longer than 62 months. [V.C. §2981]
    2. Pre-computed Basis:
      1. Multiply the original unpaid balance of the contract by a rate and multiply that product by the number of payment periods elapsing between the date of the contract and the date of the last scheduled payment.
    3. Simple Interest Basis Example (the most common loan type)

      Trade-In Value of Current Vehicle - $2,000.000
      Down Payment on New/Used Vehicle - $1,000.00
      Dealer Price of New/Used Vehicle - $12,000.00
      Remaining Balance Due - $9,000.00
      Annual Interest Rate - 7.5%
      Payment Term (in months) - 24

        Beginning Balance Payment Interest Principal Ending
      Balance
      1
      2
      3
      4
      5
      6
      7
      8
      9
      10
      11
      12
      13
      14
      15
      16
      17
      18
      19
      20
      21
      22
      23
      24
      $ 9000.00
      $ 8651.25
      $ 8300.33
      $ 7947.21
      $ 7591.88
      $ 7234.34
      $ 6874.55
      $ 6512.52
      $ 6148.23
      $ 5781.66
      $ 5412.80
      $ 5041.63
      $ 4668.15
      $ 4292.33
      $ 3914.16
      $ 3533.62
      $ 3150.71
      $ 2765.41
      $ 2377.70
      $ 1987.56
      $ 1594.99
      $ 1199.96
      $ 802.46
      $ 402.48
      $ 405.00
      $ 405.00
      $ 405.00
      $ 405.00
      $ 405.00
      $ 405.00
      $ 405.00
      $ 405.00
      $ 405.00
      $ 405.00
      $ 405.00
      $ 405.00
      $ 405.00
      $ 405.00
      $ 405.00
      $ 405.00
      $ 405.00
      $ 405.00
      $ 405.00
      $ 405.00
      $ 405.00
      $ 405.00
      $ 405.00
      $ 405.00
      $ 56.25
      $ 54.07
      $ 51.88
      $ 49.67
      $ 47.45
      $ 45.21
      $ 42.97
      $ 40.70
      $ 38.43
      $ 36.14
      $ 33.83
      $ 31.51
      $ 29.18
      $ 26.83
      $ 24.46
      $ 22.09
      $ 19.69
      $ 17.28
      $ 14.86
      $ 12.42
      $ 9.97
      $ 7.50
      $ 5.02
      $ 2.52
      $ 348.75
      $ 350.93
      $ 353.12
      $ 355.33
      $ 357.55
      $ 359.78
      $ 362.03
      $ 364.29
      $ 366.57
      $ 368.86
      $ 371.17
      $ 373.49
      $ 375.82
      $ 378.17
      $ 380.53
      $ 382.91
      $ 385.30
      $ 387.71
      $ 390.14
      $ 392.57
      $ 395.03
      $ 397.50
      $ 399.98
      $ 402.48
      $ 8651.25
      $ 8300.33
      $ 7947.21
      $ 7591.88
      $ 7234.34
      $ 6874.55
      $ 6512.52
      $ 6148.23
      $ 5781.66
      $ 5412.80
      $ 5041.63
      $ 4668.15
      $ 4292.33
      $ 3914.16
      $ 3533.62
      $ 3150.71
      $ 2765.41
      $ 2377.70
      $ 1987.56
      $ 1594.99
      $ 1199.96
      $ 802.46
      $ 402.48
      $ 0.00
      TOTALS   $ 9719.91 $719.91 $ 9000.00  


      This example assumes a fixed rate based on 365 day year, simple interest loan. Figures may vary due to a dealer's additional costs, taxes, or other regulatory fees.
car
  1. Pre-Computed Basis Loans, Note:
    1. Pre-Computed Basis loans require the buyer to pay back the principal plus the full amount of interest that will accrue over the entire term of the loan, even if the buyer pays off the vehicle early. Using the “Rule of 78’s” method, the lender applies more of the buyer’s previous payments toward interest and less toward principal. Using "Rule of 78s," a lender typically collects three-quarters of a loan’s interest in the first half of a loan’s payments. These types of loans are seldom offered to, or accepted by, the average consumer, and are most often used only in deals involving buyers with seriously damaged credit.


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