Acquiring a truck loan entails entering a financial agreement encompassing specific terms and conditions, akin to any other legally binding contract. During the setup of their truck loan, business proprietors might frequently place greater emphasis on securing the most economical loan, sometimes overlooking certain nuances embedded in the loan contract. While borrowers typically scrutinize the interest rate as a crucial determinant for attaining budget-friendly truck finance repayments, repayment calculations inevitably command significant attention as they directly impact cash flow.
Considering the multiple aspects associated with a loan is a worthwhile exercise. In this context, we are specifically addressing the calculation of pay-outs, a process that often involves the concept of ‘break fees.’ These fees or penalties are triggered if a loan contract is terminated before the originally set end date of the fixed loan term.
This can occur under a number of scenarios:-
- When extra payments in addition to the scheduled monthly loan repayments are made. This is quite a common practice with consumer loans but less prevalent with business finance. When additional payments are made while the monthly repayment schedule is adhered to, the loan will be fully paid prior to the end of the loan term and break fees may apply.
- When the truck is on-sold or traded-in while under finance, which is before the end of the loan term while repayments are still owed. This would involve paying out the loan and would attract fees in the payout.
- When a truck loan is refinanced this involves finalising the existing finance contract prior to the end of the term.
Commercial Loan Break Fees: Calculation Methods
Unlike the consumer finance sector, which is subject to regulation by ASIC, the commercial and business finance sector operates without such regulatory oversight. Consequently, break fees on business finance contracts, such as truck loans, are determined on an individual basis by lenders.
It is at the discretion of the lender as to which method or formula they apply to calculate the payout and hence the break fees. The main types of methods:-
- A discount rate formula
- Charging a percentage of the outstanding interest payable
- The Rule of 78 or 7/8ths
Discount Rate Payout Calculation Method
When calculating the payout figure on a truck loan under this method, the lender includes:-
- The amounts in arrears if any are owing
- The amount of the repayment instalments still outstanding over the remainder of the loan term calculated at the Present Value.
- Any balloon or a residual amount calculated at the Present Value
- Any charges and fees payable when a loan contract is terminated as set out in the contract.
Calculating the Present Value of the remaining payments and the balloon or residual sum involves applying the discount rate. This discount rate, set by the lender, is a predetermined interest rate outlined in the contract. Generally, this rate is lower than the original interest rate of the loan.
In a general sense, the present value is determined by multiplying the cumulative outstanding amounts by the monthly discount rate, and then multiplying again by the remaining number of months in the loan term.
Percentage of Interest Payable Method
When calculating the pay-out using this method, both the outstanding repayment amounts and the balloon/residual sum are taken into account. Additionally, the outstanding interest is calculated based on a percentage of the original interest rate. It’s essential to understand that the pay-out doesn’t include the full interest rate; instead, a portion of the initial interest rate is used in the calculation.
Rule of 78 Method
To recap and summarise, the ATO ruling TR93/16 sets out when it is appropriate for this method to be applied. The Rule of 78 relates to the timing of when the interest on a loan is charged to the loan by the lender.
A mathematical formula is used to allocate a larger portion of the interest payment towards repayments during the early phase of the loan term. In essence, the distribution of interest payments isn't even throughout the loan term; instead, a higher proportion of interest is paid by the borrower in the initial stages. Consequently, the original loan amount experiences a slower reduction or repayment progress. When this method is employed, borrowers might notice that a significant portion of the principal amount remains outstanding if the loan is paid off early. To gain a deeper understanding of these dynamics and explore your options, we encourage you to Compare Truck Loans & Finance Options From Major Lenders. This can provide valuable insights into how different loan structures impact repayment progress and help you make informed financing decisions.
For a comprehensive understanding of the breakdown between interest and principal repayments each month, you can refer to your loan statement, which is provided by the lender.
Tips for Minimising Pay-out Fees and Charges
Facing extra fees and charges for paying off a loan earlier than planned can be quite frustrating. While there might be situations where selling a vehicle and settling a loan early is unavoidable, borrowers can take certain considerations into account when setting up a loan to minimize unnecessary expenses.
One important factor is to think about how long you intend to keep the truck when you're purchasing a new one and arranging the loan. Although it might not always be easy to predict, giving it some thought can be helpful. For instance, if your usual practice is to upgrade trucks every 5 years, committing to a 7-year truck loan and selling the vehicle after 5 years could result in pay-out fees.
Reducing the loan term by 1-2 years will result in paying more in monthly payments but you will potentially avoid charges for finalising the contract prior to the agreed conclusion. You can use our truck loan repayment calculator to see potential figures on repayment options.
When entering into a truck loan agreement, it's crucial to thoroughly examine the terms associated with loan pay-off to grasp how the lender computes the payoff if the loan is concluded before the agreed-upon term. Your Jade Truck Loan Broker will assist you in customizing your loan arrangement to suit your preferences. They will also negotiate the most suitable loan terms and repayment amounts that align with your unique requirements.
Contact 1300 000 003 for a quote on lending.
DISCLAIMER: THIS INFORMATION IS ISSUED PURELY FOR THE PURPOSE OF GENERAL INFORMATION PROVISION. IT IS NOT TO BE TAKEN AS THE ONLY SOURCE OF INFORMATION FOR BASING FINANCIAL DECISION-MAKING. THOSE REQUIRING FINANCIAL GUIDANCE AND ADVICE SHOULD CONSULT WITH THEIR FINANCIAL CONSULTANT OR ADVISOR. NO LIABILITY IS ACCEPTED FOR ANY MISREPRESENTATION OF POLICIES, DATA OR ERRORS IN THIS CONTENT.