A few weeks ago, my friend Kacie was talking about how she’s changing up her plans on paying her car loan off early.  She was saying that she’d have to pay a 1% “prepayment penalty” for paying off the loan early.  I was so excited when I realized I could help her save that money instead of paying it. I hate that banks charge clients for paying off loans early.  That just seems so backwards to me.  Every time I get to the prepayment penalty line during a loan closing, I explain to my clients how they can get around the prepayment penalty.

Here’s how you can do it.  Say you’ve got enough money saved to pay off your loan in full.  The bank you’re using charges a 1% prepayment penalty.  Your remaining balance is $10,000.  If you go to the bank and ask for a payoff amount, they are going to tell you somewhere in the ballpark of $10,100.  ($10,000 principal balance plus 1% prepayment penalty)  It will probably be a little more because of unpaid interest that hasn’t been billed yet.  Instead of making a lump sum payoff, break it down.

Ask to make a principal only payment of $9,999 or something close to that amount.  Make sure you find out how long it takes for the payment to post.  At my bank it’s usually overnight.  The next day, go in and ask for a payoff calculation.  Your new balance is going to be around $1 plus any unpaid interest.  When the teller gives you a payoff, the prepayment penalty is going to be a penny!  (1% of $1)  Awesome!  Make sure you share with your financial savvy friends!    

And that’s how you avoid a prepayment penalty!  I hope I’ve explained that well enough.  Please let me know if something’s not clear.

With the current credit crisis happening before our eyes, now is the time to make sure your credit report is in order.  Many banks are taking precautionary measures to ensure a credit crisis like this doesn’t happen again.  They are lowering the loan to value ratio on how much they will lend up to the home’s value; for example, my financial institution used to lend up to 100% loan to value, and now the maximum is 85%.  The are verifying income on a regular basis and requiring pay stubs.  It seems that the rules are being changed and banks are buckling down even more on a daily basis.

Today it was announced that if there’s a joint application, the rate of the loan would be based off the person with the lower credit score.  Hypothetically, if Mr. Money and I applied jointly for a loan and my credit score is 800, which would be an interest rate of 5%, and his credit score is 700, which is an interest rate of 7%, they are going to give us the 7%.  It is really devastating for someone who has horrible credit and has a strong co-signer.  It’s almost not worth having that co signer anymore.

While I understand all the rules and regulations, it’s still hard for me to grasp.  Almost my whole banking career we’ve been very giving with our loans.  As long as you had good credit, a steady income, and would sign on the line, you’d get the loan you wanted.  Not anymore.  We’ve been struggling every month to meet our loan goal.  Thankfully, they did lower it, but even then we’re still struggling.  It just amazes me how fast things can go downhill.

What’s your opinion of all these new rules and regulations for lending?  Do you think they are a good thing?