Question Subprime Auto Loan

[AndHereWeAre]

Hi,

We recently were able to purchase our leased truck from Chrysler using subprime lender Westlake Financial.

We got a rate of 9.49% which seemed pretty good, given the circumstances.

When I went to plug the loan details into Quicken, however, for the given amount, rate and term, there is a difference (less than) for what Quicken says we should pay and what our actual payment is. I tried various selections to try and match WL's but never could. It's not a big amount, $2.19

After we made our first payment, we saw the breakdown for interest/principle per payment. The interest portion is much more than the principle portion which again differs from Quicken - it shows the reverse.

I've been looking around and read a few articles on subprime lenders using precomputed interest for auto loans. Is that maybe what I'm dealing with here? Do you know of an online calculator for a precomputed interest loan? I can't find one.

I'm trying to get info from WL, which has a decent portal and mobile app, but their folks on the phone are not very knowledgeable and neither are their folks who reply to support emails.

Any thoughts?

Thank you!

[justbroke]

The difference is usually due to accrued interested between the time that the loan is written and the date of your first payment. There are some amortization calculators which let you put in the loan date and the first payment date.

For what it's worth, and given the interest rates today (the federal lending rate), a 9.49% loan is not all that bad. I would call that a "non prime" rate and definitely not a "sub prime" rate.

(Sometimes, it is due to a fee that is charged to record the loan. For example, if they charge a recording/title fee of $20, you may not have noticed that. Combined with the first payment date versus the loan date, you will get a different monthly payment value than using a normal amortization calculator with the base loan amount.)

[AndHereWeAre]

Thanks for the perspective. We were actually pretty ecstatic to get that rate since we are in active bankruptcy.

[shipo]

It could also be Westlake is using the "Rule of 78s" method of payment accounting:

• https://en.wikipedia.org/wiki/Rule_of_78s

[AndHereWeAre]

Thanks for the link!

[justbroke]

It could also be Westlake is using the "Rule of 78s" method of payment accounting...

I just vomited in my mouth.

Rule of 78s is the WORST amortization rule on the planet. It should be blocked for all types of loans and you can thank God that they are not allowed to use this for mortgages and certain other installment loans. One time, in a complete emergency, I borrowed from one of the local loan sharks (CitiFinancial). I was lucky that they were no longer using the Rule of 78s because I intended to, and did, pay off the loan very very early. It's like borrowing from a loan shark and paying back before the end of the week. The "vig" (interest) is still due!

[shipo]

Yup, 78s sucks, period, full stop, the end. Any financial institution using it should be taken to task, privately, publicly, and legally for such practices. That said, last time I checked (and it has been years since that happened), using the Rule of 78s was still legal for many financial transactions.

[Carmella]

Did they still use this on mortgages say 20-25 yrs ago? I thought it was common that with a mortgage during the early years you pay more interest than later years? I remember hearing that back in the day. I think my mortgage was that way with less money to interest as the years went out which was why if you paid extra you put it directly on principal? Just wondering. Glad they no longer allow it

[justbroke]

For mortgages, you pay more interest in the early days just purely due to the balance remaining on the loan. Mortgages use simple interest and lenders are strictly prohibited from using this Rule of 78s. The rule seems to be a money maker for shorter loans (of less than 5 years) as they precompute the interest up front (the interest is amortized up front so you pay interest on interest).

[Carmella]

Thanks for explaining justbroke

[AndHereWeAre]

So bit of an update.

I emailed WestLake about why the interest payment is much higher than the principal and received no response.

A few days ago, our 2nd payment was due and this time, the interest was MUCH less than the principal... Basically the way it should be.

Going to do one more payment to see which way it falls next time and then going to call them and ask what is going on.

Also, took the new starting balance based off the 2nd statement and entered that in Quicken (i.e. created a loan starting on the 2nd payment). When I did that, I got within .33 cents (more) of our payment...

[justbroke]

I still believe that it was due to it being the first payment, and the interest accrual from the time the loan was made and the time the first payment was (due to be) received.

[AndHereWeAre]

I now have 5 payments completed and with the exception of the 1st one, principal is always more than interest. However, the amount various significantly and goes up and down from month to month. Never had a car loan like this...

[justbroke]

The interest should go down over the life of a "simple" interest loan. I don't get it either. But, if it's a relatively small amount, then it may be due to the difference in the # of days in the calculation (30 days versus 31 days... and even February).