Reasonable Early Payment Penalty for Closing Loan Early

LBobLim on 08/08/2017 - 15:58

Hi OzB hive-mind

I have a principal loan balance of $1.00 on my secured car loan, which is scheduled to end in 3 years' time. The finance company is asking approximately $500 to close out the account and release their security interest on the vehicle. This is provided for in my contract and consists of a fixed component, variable component based on term remaining, and interest rate loss penalty component (the latter of which I calculate to be basically 0 with that total, and with global interest rates rising I don't see it becoming a problem1).

The only real motivation I have to discharge the loan is to lower my insurance premium, so if it doesn't make sense from that perspective then there's no point as far as I can tell. The difference in insurance premiums between the vehicle with a secured loan and with no finance is approximately $240/year.

I pay no ongoing fees on this loan, so on the scheduled final date in 2020 the only payment required would be the current principal plus interest for a total of approximately $1.20.

With this in mind, what is a reasonable figure to pay for the closing of the loan?

I've already begun the negotiation process and as far as I can tell they have essentially no leverage here. In any case I see absolutely no benefit to the finance company incurring admin costs to maintain a worthless loan.

Thanks all

  1. If they've done it properly, the only amount subject to any future variable interest rate risk is the $1 principal anyway… ↩

Financial

Comments

  • garetz on 08/08/2017 - 16:16
    +3

    The reasonable figure is whatever you agreed up on your contract. The real question is would you prefer to be down $500, then get back $240 per year over 3 years totalling $720. Or keep your $500 and pay more for your insurance.

    I would personally keep my $500, and shop around for cheaper insurance options.

    • BobLim on 08/08/2017 - 16:25

      Yep that's the dilemma. Insurance is as cheap as it can possibly go unfortunately, and the $500 would obviously decrease over time until it comes under the premium difference regardless. The contract is largely irrelevant at this point as neither party is likely to want to remain bound by it.

  • [Deactivated] on 08/08/2017 - 16:36
    +1

    The difference in insurance premiums between the vehicle with a secured loan and with no finance is approximately $240/year.

    Huh? Which insurer is this?

    In my experience (IAG brands - NRMA, Coles, etc and Suncorp Brands - AAMI, etc), having finance on the vehicle should not change the premium. They only ask you the question about whether the vehicle is financed, so the financier can be noted on the certificate of insurance.

    I just ran a few quotes again to double check and finance didn't change the premium…

    With this in mind, what is a reasonable figure to pay for the closing of the loan?

    $1.20 as you calculated.

    In any case I see absolutely no benefit to the finance company incurring admin costs to maintain a worthless loan.

    I doubt anyone looks at the admin cost on 1 non-profitable account. They'll probably go through a cost cutting round every 5 years, where they close the non-profitable accounts.

    On the flip side, they can probably wait until you owe them 5c in interest, have a direct debit fail and then charge your late fees, interest of late fees, etc, so your account does turn into a profitable one!

    • BobLim on 08/08/2017 - 16:42

      RACV, but I just tried with AAMI and it does the same thing with an increased premium for finance.

      • [Deactivated] on 08/08/2017 - 16:54

        RACV, but I just tried with AAMI and it does the same thing with an increased premium for finance.

        Interesting - I just tried AAMI/NRMA in NSW and it seems to make a difference. Not $240/year, but I guess it depends on the quote details. This wasn't the case a few years ago. I must've made a mistake when I tried in my 1st reply.

        I would speak to the insurance company about it, seems like a silly reason to load your premium. I don't see how finance increases your risk factor, (especially if you just got finance for tax purposes). You could easily get a personal loan, use a credit card, mortgage offset or other unsecured finance and the insurer wouldn't be any wiser.

        I would also check a few other insurers, to find out which ones don't have a loading factor for finance and see if they'll price match RACV/AAMI.

  • oscargamer on 08/08/2017 - 18:01
    -1

    why not offer them $250 or tell them they can wait 3 years and get nothing?

    • [Deactivated] on 08/08/2017 - 21:02
      -2

      better off making a complaint to the Financial Services Ombudsman … they'll settle pretty quick, because they have to pay fees for every complaint.

      • BobLim on 09/08/2017 - 00:03

        Not really a problem the FOS can help with. The credit provider is contractually entitled to the payment if I pay out early, there's just no reason that I would accept that if it doesn't make sense for me, and they should know they're not getting the money unless it's a more reasonable amount (aka best option for me).

        • [Deactivated] on 09/08/2017 - 00:20
          -1

          Not really a problem the FOS can help with.

          Of course it is (unless the loan is a commercial loan). Exorbitant fees (regardless of what the contract says) is something they have look at.

          The credit provider is contractually entitled to the payment if I pay out early

          If you're already decided they're contractually entitled to it, what are you hoping to achieve in this thread? Just pay up and shut up.

          and they should know they're not getting the money unless it's a more reasonable amount

          Think of the FOS complaint as a negotiating tactic. You're not going to get anywhere trying to negotiate with someone in a call center who gets paid $20/hour and has no clue about the company's bottom line.

          If you go through the FOS, you'll get to someone more senior in the company who has incentives to settle FOS complaint, because it's easy to burn through $500 if the complaint draws out for more than a day.

        • BobLim on 09/08/2017 - 17:07

          @sp00ker: And what would be a reasonable amount to accept in that case? $300? $50?

        • [Deactivated] on 09/08/2017 - 17:21

          @BobLim:

          $1.20 as you calculated.

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