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Once the advance payment reaches a sizeable amount, you can contact the bank and ask for a change to the contractual arrangement. PERSONAL FINANCE Advance payments on car finance can be confusing as each finance house has different ways of treating them. Any debt that you pay off sooner than required will save you money on interest.
However, you need to understand how advance payments work depending on the type of asset you are financing. If you pay in extra on your car finance each month, it is allocated to an “advance payment” account in accordance with the provisions of section 126 of the National Credit Act. The allocation of additional payments in reducing the principal debt is achieved by accruing interest on the advance payments, at the contractual interest rate applied to the credit agreement.
READ: Sars demands more than R11m in unpaid taxes from SA racing star Jimmy Auby In other words, the advance payment earns the same interest rate that is charged to the principal debt, in order to create an interest offset. What causes confusion is that these advance payments and the interest accrued are reflected separately on car finance statements and may cause confusion for customers, so it’s always best to contact the bank directly for them to assist with an explanation. Once the advance payment reaches a sizeable amount, you can contact the bank and ask for a change to the contractual arrangement.
You could ask for the advance payment to be capitalised, which reduces the term of the loan, or change your monthly repayment. But you need to contact that bank and make these changes. Changes are not unilaterally applied merely because a loan is paid in advance.
However, if a customer wishes to settle their car finance, any settlement amount provided would reflect the advance payments. City Press reader James has been paying in extra to his car finance with Wesbank and wants to use this to pay off his car. I have been paying in extra to my car finance.
I see that I owe R8 000, but I have R31 000 in advance payments. Why can’t I use this to settle the outstanding balance? In James’s case, if he had not been making those advance payments then the outstanding capital amount would be R39 000. That means Wesbank has already taken the advance payments into account when calculating the outstanding balance.
As Wesbank explains, a client has two options with the advance payment. They can instruct that the funds be used to reduce the capital balance and reduce their monthly instalment, or the client can use the funds to settle the car finance. James can give an instruction to use the R31 000 towards settling the outstanding balance and then pay in the R8 000 difference based on the settlement amount.
The settlement amount can be confusing as it includes the daily interest accrued to the outstanding balance, which means it increases each day. The bank will normally give a settlement figure which would be valid for five days. This figure would be the outstanding balance plus interest accrued from the last debit order until the expiry date of the settlement statement.
READ: Personal Finance | What will your finance costs be in a year? For example, if James’s debit order went off on 1 September and he requested a settlement figure on the 10 September, the settlement figure would be valid until 15 September and include interest accrued from 1 September to 15 September. If James only paid the settlement on 25 September, further interest would have accrued. READ: Personal Finance | Trapped in debt review with no escape Therefore, James would be able to settle his car payment by instructing that the R31 000 advance payment be used towards the outstanding capital, plus paying R8 000 on the outstanding balance, plus the interest accrued on the R8 000 outstanding balance.
If you are wanting to settle your car finance, it is best to contact your bank and ask for the settlement figure and on what date that would have to be paid. We live in a world where facts and fiction get blurred Who we choose to trust can have a profound impact on our lives. Join thousands of devoted South Africans who look to News24 to bring them news they can trust every day.
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