Pay back the money

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StuckInTheMudd
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Pay back the money

Post by StuckInTheMudd »

I'm trying to pay of my vehicle as quickly as possible. I have about R160k left. The settlement for that is at R130k. (WesBank)

With regard to interest, which would be the better option to "PAY BACK THE MONEY"?
* Put extra in every month
* Save that extra, and repay it all as a settlement?
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Re: Pay back the money

Post by ThysdJ »

Kill it ASAP. Usually the interest you save on HP is more than what you would get saving the money...
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Re: Pay back the money

Post by CasKru »

I would go for the extra every month because interest is calculated on the outstanding amount. So the quicker this value becomes smaller the less interest you will pay.

If you save the money and earn interest on it, you will be earning interest on a much smaller amount so it will not grow as fast. m2cw
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Re: Pay back the money

Post by StuckInTheMudd »

Understood. Thank you :)
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Re: Pay back the money

Post by Mud Dog »

+1

The second best you can do is take every penny you can set aside right now and make an additional payment now. Then follow up every month with the best payment you can make. Even if you only manage to do this for the next 3 or 4 months, you will be surprised at the dent you have made in your HP contract.

One thing you need to be aware of in the event that you make a once off settlement, is that there is usually a penalty clause if this is done within the first year or so. They WANT their interest

It depends on the term (length) of your contract, but with the average HP it's as Thys said - you pay almost double the capital amount.

The best thing you can do (and this depends on the early settlement penalties), is IF you have a mortgage bond that you can make an extension against (like a "Flexi-Bond") is to either settle the HP completely if no penalties apply, or to make a payment of the best permissible amount without penalties now, and then each month thereafter.

At a rough estimate, you can still save yourself in the region of 50 to 60 thousand at this point.
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Re: Pay back the money

Post by StuckInTheMudd »

Thanks Mud Dog.

My term is 54 months. And June or July will be the policy's first birthday. Seeing as my outstanding contract balance is 160, and my settlement is 130, does that not mean that there are no early settlement penalties?

Also, if I make monthly extra payments, will it reduce my monthly interest. And because my premium remains fixed, would the reduction to my outstanding capital balance increased exponentially? (If it's even noticeable)
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Re: Pay back the money

Post by venom38 »

Interest is calculated on outstanding amount x interest rate based on the daily outatanding amount x interest rate / 365. So even if you pay your installment in the beginning of the month you alao save. Say your outstanding amount is 100k and the payment is r2k. Interest is 100k * 10%/12 and the rest capital. Capital only reduces with 1166. Now pay 30k in. You still pay 2k but interest is only 70*10%/12 and capital reduces by 1416 in the first month allready and interest portion reduces each month after that
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Re: Pay back the money

Post by Stef »

And the settlement they give you is what you will pay to settle , no fees over & above that. You'll note that the settlement is very close to your outstanding capital/balance.

During the term I phoned every few months to get the settlement & compared to the statement; always within a few hundred ZAR of the outstanding balance.
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Re: Pay back the money

Post by StuckInTheMudd »

venom38 wrote:Interest is calculated on outstanding amount x interest rate based on the daily outatanding amount x interest rate / 365. So even if you pay your installment in the beginning of the month you alao save. Say your outstanding amount is 100k and the payment is r2k. Interest is 100k * 10%/12 and the rest capital. Capital only reduces with 1166. Now pay 30k in. You still pay 2k but interest is only 70*10%/12 and capital reduces by 1416 in the first month allready and interest portion reduces each month after that
So i should pay off as quickly as possible :D:
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Re: Pay back the money

Post by Mud Dog »

Yep, and a mortgage bond is the cheapest finance you can get, so borrow against that (if you have one) to pay it off. Then pay extra into the mortgage.
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Re: Pay back the money

Post by StuckInTheMudd »

That's actually an interesting approach. I don't have any other credit facilities (because I don't want), but I have a wad saved in investments. I suppose I could use that to kill the loan and put that money back into the investment. But i'm kinda reluctant to dip into my nest egg too easily.
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Re: Pay back the money

Post by Mud Dog »

Consider that the interest you're paying on the HP is probably more than the interest / dividend accrual from the investment, depending on what type of investment. You need to check on that and if it is in fact less, then rather kill the debt and then rebuild the investment. Servicing debt can be a serious millstone, although there are some scenarios where it can be applied beneficially.
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Re: Pay back the money

Post by Stef »

Agree....typically one gets 5 -7 % on an investment, and they certainly do not calculate that interest the same way as on a bond/HP. For example I got R1200 on a R50k investment over 8 months...

So if you were to take the R130k out of your investment, how much interest would you loose vs the R30k you save on the HP? Theoretically you should be able to build the investment back up over the same period as the time left on HP plus the money you have saved on interest when putting the same installment into your investment

In essence you are changing your owed interest of R30k into capital on your investment over the same period
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Re: Pay back the money

Post by Mud Dog »

Yup, and the time to do this is last year or as soon as possible. :D: ... The economic climate is looking bleaker - Interest rates are on the rise and so is inflation and unemployment. The CCI (Consumer Credit Index) has dropped dramatically where credit account defaulters are on the rise and the credit market is becoming more risky. So coupled with rising interest rates, credit will definitely become more costly.
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Re: Pay back the money

Post by StuckInTheMudd »

Oh yes. Exactly why I'm want to get rid of my debt ASAP. I'm reluctant to use up all of my reserve at once though. I only have about R130k saved. I've already paid R20k today from what I had laying around. So perhaps I could see how much I can manage to scrape together every month, and use part of my savings to wipe away the debt.
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Re: Pay back the money

Post by Huxli »

Paying in more than the installment on an HP will not reduce the capital balance on which the interest is calculated. The account will show in advance and thats all, you then need to contact WesBank and ask for a capital reduction on the account and only then will you get the benefit. You also cant do a capital reduction every month.

If you still want to pay the extra every month i would recommend that depending on the extra amount paid you contact them after say 6 months to have the advance amount loaded as a capital reduction. The moment your account is in advance with two installments they are going to contact you for a refund in any case as new regulations do not allow your account to be in advance.

Hope this help but i would recommend call them and asking them the process and how many times a capital reduction can be done in a year/contract period. Just dont want you to pay in extra money thinking you will get any interest benefit, it does not work like a mortgage
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Re: Pay back the money

Post by StuckInTheMudd »

damn these guys make it difficult to pay them back.

Maybe I should rather save up a bit, then take a bit from my investment to settle the debt once off...
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Re: Pay back the money

Post by dalkill »

Ja Ed, this is why i never bought a vehicle on HP.

Started out small, paid R18K cahs for my first vehicle, saved up, sold it for more than i bought it (it's a toyota :-) ), upgraded , and so on. During the time of saving, i put extra cash in the bond and take it out again when i buy next upgrade cash.

this way i only have one debt, and never had any issues with paying more into the bond than what the nominal amount is
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Re: Pay back the money

Post by StuckInTheMudd »

that is some good advice. :) I think I should follow suit...

My current bakkie is the highest I foresee I'll ever go. So I'll never need to upgrade as such, but rather replace her with something similar when she retires.
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Re: Pay back the money

Post by Stef »

Bond interest is compound interest; so I'm a bit weary of taking money from there.

But if you have 130k available on a flexi-bond, then your bond installment should increase by +- R1300. (A second bond will cost about R10k to 15k just to register).

So for example if you currently pay R3k on HP and you go the bond route with R3k extra as opposed to just the R1300, a R1700 will go against capital (bulk of the R1300 will be servicing interest); so my logic says that 130k / 1700 = 76 months...granted the interest reduces every month, but by how much?

I could be wrong, but I think you'd be fortunate to drop the capital by that 130k in 60 months, obviously dependent on the outstanding capital, so if you have less than 60 months left on HP it doesn't make sense to me
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Re: Pay back the money

Post by StuckInTheMudd »

Huxli wrote:Paying in more than the installment on an HP will not reduce the capital balance on which the interest is calculated. The account will show in advance and thats all, you then need to contact WesBank and ask for a capital reduction on the account and only then will you get the benefit. You also cant do a capital reduction every month.
The R20k that I deposited last week has appeared against my capital balance automatically. I'm not sure if this will always be the case though...
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Re: Pay back the money

Post by swartvark »

The credit act from 2006 prevent them from charging penalties when you do cash injections. A lot of people Finance their vehicles for the full amount instead of giving a deposit. This way they get a better interest rate from the bank. They then pay the money they saved as a deposit into the account after a month or so.
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Re: Pay back the money

Post by StuckInTheMudd »

This is all very useful info, I wish I knew this a year ago!
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Re: Pay back the money

Post by Stef »

StuckInTheMudd wrote:This is all very useful info, I wish I knew this a year ago!
Same here, but SWAMBO's Polo is paid off now....2 late :mrgreen:
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