[Wallenberg]

There is a little-known banking policy that you really should know about. If you don't know about this, it can easily cost you a lot of money should you ever take out a mortgage or a car loan from a bank. Banks take advantage of people who don't know about this policy and make huge profits as a result. Unfortunately, these profits come right out of the pockets of people, just because they don't know about the policy.

It would be of great benefit to most people if this policy was to become widely known. But since that's not in the bank's best interest, they generally try to keep it quiet. In banking circles, this policy has a name, but unfortunately, I can't remember the exact name. I've heard it referred to as something like "The Rule of Sevens and Elevens" (ROSE) or something similar. The rule applies to any kind of bank loan. I will explain to you how this rule enabled my bank to make a $5,000 profit at my expense. I lost $5,000 because I wasn't familiar with this rule.

I once bought a new car and arranged to finance it with my bank. At that time, I had a perfect credit rating, an excellent job in a very secure corporation and a very high salary. I was only 25 at the time but I earned almost double what an executive with a similar corporation would have earned. I had a large amount of money in savings - approximately twice the value of this new car. The reason my finances were so good was that I had an excellent education in a field that was highly in demand. As a result, I got several excellent job offers from a number of large corporations.

To give you an idea, let's say this new car was a mid-range BMW with all the bells and whistles. In today's dollars, it would have sold for about $40,000. I didn't need to finance this car. But I was very naive and just figured it would be better for my cash flow if I paid for it with a bank loan like most people do. For some people, in some circumstances, that could have been a good decision. In my circumstances, however, it was a terrible decision. But I was young and really didn't understand much about finance and I made a terrible mistake. I trusted my bank's loan officer and took his advice. The advice he gave me was designed to maximize the bank's profits. But he didn't care one bit about my finances.

The loan officer advised me to take a loan for the full purchase price even though he knew all about my finances and should have advised me to pay for most of the car with my savings instead of borrowing money. Anyway, now we come to the part that explains how and why this policy made the bank a huge profit and cost me $5,000 because I didn't know this policy existed. A tiny bit of knowledge could've saved me $5,000. But my bank was in no mood to help me when they saw that they could just as easily help themselves. Help themselves to my money, that is.

When I bought that first car, I took out a 36 month loan on the full purchase price - $40,000. That was the loan principle - $40,000. The monthly payment was $1574 which means that I would have paid the bank a total of $56664 over the 36 months. But 18 months later, I got a promotion and decided to buy myself a new car. It was one that I had always wanted - a beautiful new Corvette. It came with many options and cost about $60,000 in total. In this explanation, I'm using some car models and dollar amounts that would be accurate in terms of today's cars and prices. I got a good trade-in value for my first car (the BMW). To keep things simple, let's say the price of the new car less the trade-in value was $40,000. That was exactly the same as the original price of the first car.

The original price of the old car was $40,000 and I had paid exactly half the payments. So, I assumed that meant I had paid off half the original principle - or $20,000. Therefore, I assumed I could pay out this loan early by paying $20,000. But, that was completely wrong due to this Rule of Sevens and Elevens (ROSE). You see, the banks have it organized so that when you pay off a loan, the first month's payment goes almost entirely towards paying off the interest and almost nothing goes towards paying off the principle. But as time passes, a slightly larger proportion of each month's payment goes towards the principle while a slightly smaller proportion goes towards the interest. Finally, when you get down to the last month's payment, it goes almost entirely towards paying off the principle and almost nothing goes towards the interest. This is the Rule of Sevens and Elevens.

OK. So what's so wrong about this? Well, nothing is wrong provided you pay off the loan in full over the full term. But if you need or want to pay off the loan early, you stand to get a big surprise as to how much interest and how much principle you think that you have paid. In my case, the original principle was $40,000. I wrongly assumed that after I made half the payments, I had paid off half the principle and half the interest. But the bank informed me that due to ROSE, I had actually paid $13,332 of the interest (which was $5000 more than half) and only $15,000 of the principle (which was $5000 less than half). They told me I still owed them $25,000 of the principle and that was what it cost me to close out that loan.

When I went into my bank to let them know that I had sold my old car and purchased a new one, they advised me that I had to pay off the original loan since I no longer owned the car that was being used as collateral to secure that loan. But that was not true and I feel the bank cheated me by taking advantage of my lack of knowledge and lack of understanding about ROSE and by lying to me about the need to close out that first loan. It cost me an extra $5,000 to close out that first loan early and it was entirely unnecessary for me to do that.

The bank would say that it was my fault that I lost the $5,000 because I didn't read the loan agreement which explains about ROSE, but that information is contained in the fine print and it is unfair for banks to take advantage of people in this way - especially when the costs are so high. After all, who expects banks to operate by taking advantage of people and tricking them like this?

As far as I'm concerned, the bank played dirty and essentially tricked me into paying them an extra $5,000 and I see this as a very common occurrence. Many people are so ashamed and embarrassed to learn how they've been tricked that they don't even say anything about it. But I think it's important for people to spread the word about these banking policies and make them widely-known. It seems to be the only way to prevent banks from operating this way. Thank goodness for the internet. The net makes it much easier now for people to spread the word by telling all their friends and family about this kind of stuff and by posting messages like this one for others to see. I urge you to tell all your friends and family about this in order to protect them and if you know of any other good message boards you can use to help spread the word, I would urge you to post this information there. Hopefully, we can help to make this ROSE policy widely known and help prevent people from unfairly losing so much money to banks.

[Perfesser]

Nearly everything you object to regarding installment loans is standard practice, known to anyone who has ever financed a car, house or other major purchase, and not likely to change. Interest in these loans is based on the REMAINING balance, i.e. the first month's interest is based on the whole balance, the next month's on the balance less the principal paid, an so on. Find a free amortization calculator and set up an example over say 5 years for $40k...then do it for $120k as in a house loan for 30 years. A home loan over 30 years will TRIPLE the total repaid and for the first 12 years or so it's almost all interest.
There are some lenders that use 'simple interest' where the total is calculated and spread out evenly across the loan...evidently that's what you thought you had, but these are usually 'tote the note' car lots or suchlike and the rate is a lot higher.
"When I went into my bank to let them know that I had sold my old car and purchased a new one, they advised me that I had to pay off the original loan since I no longer owned the car that was being used as collateral to secure that loan."
The dealer that sold you the 'Vette should have added your loan payoff to the new loan and paid the loan on the BMW off in order to get a clear title. If he did not then you ARE responsible for the balance of the loan since you no longer have possession of the collateral property...basically you don't own the vehicle (the bank does) until the loan is paid off.
Same thing applies to selling a house with a mortgage; the bank gets their money at closing or the deal doesn't happen.
"The bank would say that it was my fault that I lost the $5,000 because I didn't read the loan agreement which explains about ROSE, but that information is contained in the fine print and it is unfair for banks to take advantage of people in this way - especially when the costs are so high. After all, who expects banks to operate by taking advantage of people and tricking them like this?"

The bank is right. The law requires that every detail of a loan...the interest rates, the way interest and principal pay off, prepayment issues...must be disclosed in writing. If you didn't read the 'fine print' or ask for an explanation...TS. Most loan officers will print out an amortization table if you ask for it and should explain anything you question.

On any installment contract all you have to do is call the lender/lienholder and ask for a payoff amount; they will give you a figure good until the next payment due date. You'd have found out about the 'discrepancy' then instead of after the new deal was signed.

If you had the scratch to pay for that BMW up front you should have, or at least put half down. The loan officer did play on your inexperience in financial matters in that respect.
But hey...it's his job to get money coming in to the bank in the form of interest.
Taking a 3 year loan was a good move; ALWAYS take the shortest possible term on an installment loan. I heard the other day that they are trying to write home mortgages for 40 or 50 years...run one of those and look at the interest as it piles up.

[Wallenberg]

Hey Perfesser,

You are quite correct in everything that you say.

My main objection is that this policy is just not known to young people and people who are first-time borrowers. So it can hit them real hard if and when they ever come to re-finance their loan.

I especially thank you for your advice to always take the shortest term loan. I would add to that to try and get a loan - especially a mortgage - that is paid weekly instead of monthy - or even better - daily if possible. It's very rare to find an institution that will take money out of your account on a daily basis. But it is possible - especially if you are negotiating with more than one instituion and get one of them to go weekly - then you may be able to get the other to go daily. Weekly is a huge savings over monthly. Daily is better than weekly - but only a little better. If you can get a mortgage with weekly payments instead of monthly, that makes a huge difference on a mortgage. I would strongly recommend to anyone getting a mortgage that you do everything you can to get a mortgage that is paid back weekly instead of monthly. You will not believe the amount you save in terms of total interest paid. Sometimes you can save almost a quarter of the total interest.

Any mortgage that I ever take out again will be paid back on a weekly basis or even daily, if possible. I once played tennis with the manager of a credit union and he had some automatic computer programs set up to pay off mortgages on a daily or weekly basis. I couldn't believe how much total interest payments I saved by making weekly payments instead of monthly. And then daily over weekly was also a big savings. It was unbelievable! Just freaking fantastic!!

Thank you very much for your thoughtful and considerate reply. I hope that lots of people who will be taking out a mortgage read your post. Screw the banks! Why should they be able to pick our pockets for thousands of dollars just because we are ignorant of some of their basic banking policies?

One last thing, by the way. In some states/provinces, the laws vary as to when a bank can reposses a car. For example in some states, after you pay off 18 months of a 36 month loan, they can no longre reposses the car. They can sue you for the outstanding balance. But they can't repossess the car. In those cases, I'm thinking you should never refinance your loan if you sell your car beause they can't repossess the car ayway. So screw them! Just pay off the loan like you agreed and and to hell with the bank! As a matter of fact, I'm thinking you should never refinance a car loan. Just pay it off and take out a new loan. Why give the bank a big winddfall profit? They didn't do anything to deserve it.

[Wallenberg]

One other point I'd like to add is that I wrote the original post for a bank. But it was actually a credit union and the credit union gave me the impression that they operated like a big happy family where they treated their customers like family. So, I never would have ever imagined that they would operate by taking advantage of their members to profit as a result of the ignorance of their members. That sure feels like dirty pool to me.

[tomlunt]

BluxMax -

It's called compound interest and is just simple math. And it works both ways .... invest when you are young, and in 30 years you can become VERY rich. Filthy Rich!!!

Tom

[Perfesser]

I don't know about the time limit or payment limit on repo's...never heard of it either in Texas or here in Arkansas. (May be a Canadian thing). I know in TX it won't matter if you're just one payment short and they can tow it any time, anywhere. Same for Arkansas, I suspect. The place I get most of my mechanic work done is a 'tote-the-note' lot but the mechanics are first rate; I'll have to ask Christi next time I go by there.
My brother had to let a nearly new Kenworth rig go; he was left with over $40k to pay back.
If you let a car loan default, or sell the car, there's a provision in the fine print that the balance is 'due and payable immediately'. If you make them file suit or even delay too long it'll be reported to the credit bureaus and any new loan you try for will have a really bad interest rate - you're going subprime - and it'll stick to you for years. Not worth the satisfaction.

[Wallenberg]

Perfesser,

You know, I think I spoke too soon wrt the States. The truth is that I'm not at all certain how repos work in the States. I do know that in Canada, there is a limit and beyond that limit they have no right to repossess the car.

If you think about it, it only makes sense. So, I'd be very surprised if it operated differently in the USA. After all, if you have a 36 month loan and pay $300 per month and you paid 35 months and just owe one more month, then it's reasonable that they can sue you for that $300 you owe them just as if you owed $300 to anyone for anything. But it seems kind of nuts to me to think they have a right to repossess your $30,000 car just because you used it as collateral when you originally took out that loan.

It's like you yourself said, it works based on how much money is currently owing. If you only owe them $300, it just don't make sense for them to have the right to sieze your $30,000 automobile to try and secure payment. After all, if you owed them that $300 for any other kind of debt, there's no way they'd have the right to sieze some property from you that was worth 100 times the value of the debt. That's just crazy!

Anyway, it would be very interesting to find out what the law is in the USA. I bet it's different in every state. Texas is usually very harsh on criminals and debtors. So, I wouldn't be surprised if Texas allows the bank to sieze the car. But it would strike me as very unfair.

Besides which, what would happen if you sold the car say after 30 months of the 36 month loan? Knowing how harsh Texas can be, can it possibly be a criminal offense to sell the car that you were using as collateral before the loan is paid off? It sure would be interesting to learn what the law is in Texas.

But sure it only makes sense that the consequenses of selling the car you were using as collateral depends on how soon you sold the car. I mean if you sold it after one month, surely that would be a very different situation than if you sold it after 35 months. Don't you think?

[Wallenberg]

Originally Posted by tomlunt

BluxMax -

It's called compound interest and is just simple math. And it works both ways .... invest when you are young, and in 30 years you can become VERY rich. Filthy Rich!!!

Tom

Compound interest is indeed very powerful. But it's only a sure thing if you invest in a sure thing. Investing in stocks can be tricky. If the valule of the stock doesn't go up, you can have a big problem. It used to be the case that you could get high interest rates on Certificates of Deposit, but interest rates have fluctuated wildly in past years. In 1985 they were extremely high (around 20 percent in Canada). But lately, you're lucky to get 5 percent. So, it all depends on how much interest you can get versus how much inflation costs you and you lose.

But the issue we are discussing here is what happens when you buy a new car with a bank loan and then trade-in that car on another new car halfway thru the loan. If you cancel the loan and take out a new loan for the new car, you wind up taking a huge beating on the outstanding amount still owed the bank. It's better to not pay off the old loan and just take out a new loan to cover the difference that you owe.

[jonasdatum]

I haven't read up on my economics and loans in a while but from what "I think" I understand, you should have cacluated the intrest and ask how the payment to them was allocated. You can go to a good bookstore and pick up a "quicknotes" and I am sure you'll find that explains all of the intrest payments.

Reminds me of my worst investment to date: A Term Life Insurance Policy. http://www.investopedia.com/terms/t/termlife.asp
http://www.investopedia.com/search/r...life+insurance

The only reason I got life insurance in the first place was because my Grandmother wanted me to.

Long story shot, during the course of 4 years I read up and learn that this insurance under most curcomstances is pointless. Even when discussing it with a relative (who was there when I signed the paperwork) that had the same type of policy said "well I don't know much about the types of policies."

You have to learn about what you're getting into when it comes into financing anything at all. NEVER BE AFRAID TO ASK QUESTIONS! They inticipate you to sit there and take it. In fact that is what many people do. They also use your family to get you to sign. The initial Rep that sold me my policy, sold my relative his. Also, those initial payments I made to the policy were going to the Rep. that sold me the policy.

LOL, I was only slightly younger then you were then.

[jonasdatum]

Originally Posted by Perfesser

I don't know about the time limit or payment limit on repo's...never heard of it either in Texas or here in Arkansas. (May be a Canadian thing). I know in TX it won't matter if you're just one payment short and they can tow it any time, anywhere. Same for Arkansas, I suspect. The place I get most of my mechanic work done is a 'tote-the-note' lot but the mechanics are first rate; I'll have to ask Christi next time I go by there.
My brother had to let a nearly new Kenworth rig go; he was left with over $40k to pay back.
If you let a car loan default, or sell the car, there's a provision in the fine print that the balance is 'due and payable immediately'. If you make them file suit or even delay too long it'll be reported to the credit bureaus and any new loan you try for will have a really bad interest rate - you're going subprime - and it'll stick to you for years. Not worth the satisfaction.

In most states, the lien holder recieves the title. In my state, the title holder recieves the title.

[Perfesser]

In most states, the lien holder recieves the title. In my state, the title holder recieves the title.
(But that title should show an open lein and the lienholder's name and address).
Yep...that's where I was going next! The lienholder has the title and until the loan is paid in full the buyer doesn't get a 'clear title'; without that paper you can't sell the car to any dealer. IF you sell to a private party without clear title he can't get a title or register the vehicle in his name - so it's still in your name even though he has possession. Guess who the lienholder is going after if the payments stop. Or if it's involved in a crime or a hit and run - bigger problems. Basically the same as selling a house - I can't sell it without clearing the loan from my name.
If I recall right Texas used to issue a 'red title' if the lien was not paid off, then you had to get a new 'blue' title from DMV. That changed a few years ago and the leinholder sends another copy with the lien section signed off as paid.
From the lienholder's point of view: you borrowed $40k and put up the car as collateral. If you relinquish that property to someone else they have no recourse other than court action to get their money which may cost them more than the car is worth - except that YOU pay the costs of recovery (more fine print).
Put yourself in the lender's shoes for a moment. Would you sell the 'Vette to a friend and continue to carry the note knowing :
if he quits paying you you STILL have to pay for the car
you can't take it back - he has a bill of sale so you can't report it stolen! (I think the lender could still repo it because the sale was in violation of the original agreement so it's still THEIR car)
if he wrecks it and quits paying you you STILL owe the bank - and now there's no car to be paying for.
If he wrecks it or kills someone in a wreck you could be responsible; are you still payng for insurance - it IS still your car according to the law. Believe me, it happens all the time.

[jonasdatum]

Originally Posted by Perfesser

In most states, the lien holder recieves the title. In my state, the title holder recieves the title.
(But that title should show an open lein and the lienholder's name and address).
Yep...that's where I was going next! The lienholder has the title and until the loan is paid in full the buyer doesn't get a 'clear title'; without that paper you can't sell the car to any dealer. IF you sell to a private party without clear title he can't get a title or register the vehicle in his name - so it's still in your name even though he has possession. Guess who the lienholder is going after if the payments stop. Or if it's involved in a crime or a hit and run - bigger problems. Basically the same as selling a house - I can't sell it without clearing the loan from my name.
If I recall right Texas used to issue a 'red title' if the lien was not paid off, then you had to get a new 'blue' title from DMV. That changed a few years ago and the leinholder sends another copy with the lien section signed off as paid.
From the lienholder's point of view: you borrowed $40k and put up the car as collateral. If you relinquish that property to someone else they have no recourse other than court action to get their money which may cost them more than the car is worth - except that YOU pay the costs of recovery (more fine print).
Put yourself in the lender's shoes for a moment. Would you sell the 'Vette to a friend and continue to carry the note knowing :
if he quits paying you you STILL have to pay for the car
you can't take it back - he has a bill of sale so you can't report it stolen! (I think the lender could still repo it because the sale was in violation of the original agreement so it's still THEIR car)
if he wrecks it and quits paying you you STILL owe the bank - and now there's no car to be paying for.
If he wrecks it or kills someone in a wreck you could be responsible; are you still payng for insurance - it IS still your car according to the law. Believe me, it happens all the time.

One thing that is "slighly" off topic. If by some paperwork screw up you recieve the title in a state where the lienholder was supposed to get it; you can "legally" sell the car! However, the original title holder is still responsible for the debt. That being said if the debt is in default; the new owner either has to pay the debt off or give up the vehicle.

Registering and Titling Note: I am not entirely certain all the other states, but in my state YOU DON'T HAVE TO BE THE TITLE HOLDER TO REGISTER THE CAR. When you lease a car you're not the title-holder anyway so I presume this is the same for most if not all states. The insurance companies prefer this, but it isn't required by law I know of.

"Register" normally means to obtain plates (articles of registration). Most people who don't read the paper work confuse registering with titling. In my state you can have somebody else register the car and somebody else can own it. Insurance don't like this because of bottom line. Registering i.e. plates also says you have insurance for the car. Now in some states for some reason they want you to get plates on your car before buy insurance. Why this is I don't know, IMHO it makes no sense what so ever?

Finance means to take out a loan to buy the vehicle.

Lease means you have no intention to buy, you are just borrowing it for a fee. However, most contracts are drawn up so you can "buy out the lease."

Sorry, I had to point all that out.

As to one of your conclusive statements "no title no sale." So it can be reposessed, because it was an illegal sale. Wasn't like it was a gargeman's lien or something. Then I could sell it without a title.