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Car as Collateral for Loan was Totaled, Now What?
I am going to pay off a loan with pre-computed interest. I've had it for 5 1/2 months. I live in Ohio, and the original loan term was 37 months. When I called for a early payoff balance, it was $400 more than I figured. The amount financed was $4667.30 and the payments were $190 per month. This was a secured debt. My car was collateral. It has been totaled in an accident. The check they have received is for $3550.54 and I have paid $950 since March 08. The interest rate is 28.113%. The employee said I still owe them about $1000. I cannot begin to understand, can you help?
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 In many states (Ohio is one of them), interest on retail installment sales contracts may be precomputed. That means that the loan note amount includes the interest to be paid over the life of the loan. Contrast that with a simple-interest loan, which is written for the amount borrowed, and the note calls for repayment of the amount borrowed, plus interest calculated on the principal balance. Home mortgage loans are generally examples of simple-interest loan contracts.
On a precomputed interest contract, state law sets the what might be called a worst-case limit on the lender if the borrower pays off the entire loan early. In many cases, the lender is required to rebate the unearned precomputed interest using a method called a "sum of the balances" or "Rule of 78s" formula. Either of those methods allocates larger amounts of interest income to earlier months in the loan repayment schedule. What those methods do not do, however, is account for early lump-sum payments such as the one made by your insurance company. In other words, you probably received no benefit from the early payment of $3,500; the lender can treat it as having been received as part of the final payoff amount. In a simple interest rate contract, you would have received the benefit of that early $3,500 payment.
Published on BankingQuestions.com 9/05/08
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