One morning, I called my friend Karl while sitting in his car, making a payment for his car loan. I asked, "What is the principle on your car loan?" He said, "I don't know." Then he asked, "What is that?" I begin to explain the difference between the principle and the interest. I told him to return to the finance company and ask about his loan. Karl asked the loan representative, "What is the principle of my car loan?" The representative replied, "It's around $7,000." His monthly payment was $621 plus interest payments for $352 mo. In short, Karl's car payment was $973 per month. He did not understand that he was loyal to a system keeping him bound.
The bank representative encouraged Karl about refinancing during the conversation. Instead, she encouraged him to refinance to lower the interest to 2.6% with a $230 monthly payment. However, she should have told him his old and new loans would merge. Plus, they wanted to extend his loan another to 7 more years.
After hearing this, he was excited and ready to sign on the dotted line. However, Karl wanted to refrain from refinancing; he was interested in paying the car off, not refinancing.
Ultimately, I shared with Karl how to pay his car off in 4 months instead of refinancing for an additional seven years. Karl quickly learned a valuable lesson. Here is one more thought I want to consider.
What is the debt-to-income ratio? Here's a short version: your monthly income divided by your debt. Therefore, securing a loan (car, house, or more) will only be possible if your debt is within a certain percentage. For Karl, he learned that his debt-to-income ratio was too high and did something about it. When you eliminate the principle, late fees and penalties are things of the past.
What is the debt-to-income ratio? Here's a short version: your monthly income divided by your debt. Therefore, securing a loan (car, house, or more) will only be possible if your debt is within a certain percentage. For Karl, he learned that his debt-to-income ratio was too high and did something about it. When you eliminate the principle, late fees and penalties are things of the past.
Yes! I want a 20-minute free financial literacy and legacy planning session. Book Appointment