Every few weeks, I make a point of answering reader questions here in my column. I love hearing from you and researching the quandaries that are on your mind. This week, we're actually going to cover two questions and a comment. The comment is a fellow reader's idea for how the rest of us can save big bucks. Thank you! I'm trying to keep the dialogue going about saving bigger instead of smaller, smarter instead of harder.
Question: LOVE the book! We would like to use part of our tax refund to pay off my husband's truck loan to save big. We bought the truck for somewhere around $15,000 3 years ago. Our "payoff" is just over $8,000, but of course, that is with the interest. We will be getting back over $6,000 on our tax refund an were hoping to negotiate the payoff. How can we negotiate a better deal on the payoff? We are not in arrears on the payments, we just would like to cut out as much of the interest as we can. I know legally we are only responsible for the principal, so we were hoping we could get them to waive the interest. How do we go about that?
Answer: You need to examine your auto loan contract to determine whether it contains a prepayment penalty. If it is a simple interest loan with no prepayment penalty, you are golden. You can pay off the principal and you owe no further interest. Period.
If there is a prepayment penalty, it may still be worth paying it off early. You just need to calculate how much you are saving in interest and whether that penalty eats up all of your savings. If your auto loan is a "precomputed interest loan," that means it is structured so that you pay all of the interest over the first few years and then pay off the principal at the end. This will present problems if you want to pay the thing off early.
Technically, you have entered into a contract and the lender can hold you to it. However, I think it is always worth asking if a bank will work with you in a case like this. If you are a good and loyal customer of this bank, point that out. (Try to meet with somebody in person rather than some lackey who answers the 800 number.) If the savings you are striving for will make a huge difference in your life, describe that. Play upon the loan officer's sympathy.
And if you succeed, by all means, get a loan payoff letter -- it must be in writing -- which states that your loan was paid in full and satisfactorily. It would be awful if the bank reported the loan to the credit bureaus as an unpaid debt.
Question: I heard in the last week that the new CARD Act will cost credit card companies billions of dollars in lost fees, so now they're dreaming up new ones to hit us with. Figures. One of the new fees I heard about was one for not using your credit card for a long time -- a "dormancy" fee, I think they called it. So here's my question: I've heard canceling credit cards can hurt your credit score, but I definitely don't want to have to pay fees for old credit cards I stopped using a long time ago. What to do?