Some of you may remember my friend’s financial frustrations with Honda’s financial arm (if not, take a minute to read it – there’s even a cool picture and some lessons for all of us). Well, I just want to give you an update on his situation.
He decided to finance a used car, and gave them the Acura SUV as a trade-in. The dealership contacted the old financing company so that they would not send his account to collections while the paperwork is being processed. So the old loan will be paid in full and he will not have to worry about the negative impact on his credit report.
Here is what he did: He purchased a Chrysler 300 (I don’t have any other details) for $5,000. They paid off the loan on the Acura, as I mentioned above. He financed the new car and his monthly payments will be $213 – this is significant because the payment on the Acura was $600/month!
So not only did he walk away with a clean credit report (you know what I mean), but he cut his monthly payments by almost $400! Unfortunately, since his credit wasn’t the greatest, he has to pay $1,500 extra in finance charges – which the dealership (or bank, I’m really not sure) told him would only be assessed if he uses the full term of the loan (33 months). Yes, you read that correctly; he told me that he won’t have to pay the $1,500 if he pays the loan off early.
Now, I’m not sure if they actually charged him a flat fee that will be refunded (I’ve never heard of anything like that before), or if they just showed him the math on the amortization and then showed him that he is paying $1,500 more over the life of the loan than someone with average credit (due to having a higher rate) and the same terms. I assume that it’s the second case. They showed him that his bad credit is going to cost him $1,500, and demonstrated how he can reduce the total amount of interest paid by paying off the loan early.
Unfortunately, the way that amortization works is that most of the interest is paid in the earlier periods of the loan, meaning that even if you pay off the loan early your savings will not be as large as you probably think (of course, you can calculate all of your possible scenarios ahead of time).
What Are His Plans?
He plans to pay at least $300/month on the loan in order to pay it down a little faster. With the rest of the cost savings, he is going to pay off other outstanding debt as well as build up his emergency fund. Once those other areas are taken care of, he will then focus his full attention on paying off the car.
He doesn’t know this yet, but I plan to sit down with him in the near future and help him devise a plan that will serve his financial goals best. He seems ready to take his finances seriously and make necessary sacrifices. One thing I forgot to mention before is that he recently moved to a neighboring state in order to pay less in rent!
photo credit: Freedigitalphotos.net
What About You…
- What sacrifices are you willing to make (or are currently making) to reach your financial goals?
- How often to you reassess your financial situation to ensure that your are still working toward your goals?
- Have you ever had a situation where your bad credit (either score or personal reputation) cost you money?
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