Something you should know about banks. Not knowing can cost you plenty
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.
Last edited by BluxMax : 21-Jun-2007 08:53 AM.
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