GAP Insurance and Rule of 78 in IL????

[Auto_Body_Chick]

Long story short.

 

On 4/30/04 I purchased GAP Insurance for $399 on a refinance with WFS Financial. I paid the loan off 3/30/05 = 11 months.

 

I am only receiving a refund of $197.47 for 11 months of using this GAP insurance. They are charging me $201.53 for 11 months. This does not seem right. I can see a cancellation fee, which according to the paperwork, is $40.00.

 

The are contributing the remaining $161.53 as....

 

Installment Factor 1067991

In force Factor 635628

Days remaining 1127

Refund Factor 0.595162

 

__________________________

$38.69

Less $40.00 Fee $40.00

__________________________

This amount due Ownerguard for cancellation fee (1.31)

 

Total refund Owed Customer $197.47

 

What does all of this mean????

 

Cancellation:

 

You may cancel this contract at anytime prior to the occurance of a total loss by mailing or delivering written notice of cancellation request to the dealer/lender (WFS Financial) The program administrator must receive cancellation requests within (30 days) of the requested cancellation date. If the contract us cancelled after 30 days from the date of this contract, you will receive a full refund. If the contract is cancelled after 30 days from the date of this contract, the refund will be calculated using the Rule of 78 method UNLESS OTHERWISE MANDATED BY STATE LAW, less a cancellation fee. The lender will be named payee on any refund on the contract.

 

PLEASE TELL ME WHAT THIS MEANS?????

[centex]

As i understand the Rule of 78, in a nutshell, the interest is basically frontloaded. The bulk of your first few payments go more to paying interest than towards the principle.

 

http://www.amortization.com/the_rule_of_78.htm seemed to have a decent explanation of the process.

[MarvBear]

The Rule of 78's while not typical for automobile financing is commonly used to calculate refunds on products purchased concurrently with the automobile. (this does not apply to all products)

 

If you cancel early you will pay more for the policy/product than with any other cancellation method.

 

I used to have the hand written formula for calculating product cancellations via the Rule of 78's, but due to the computer age, I just let the computer do it for me.

[TomKC]

You bought a car, bought GAP insurance, then paid it off in 11 months? Maybe your financial situation changed significantly during the period, but that was a really bad idea, if you had just put enough money down on the car, GAP insurance wouldn't even have been necessary. Did you check with your insurance company if they offer it? My insurance company includes it on my policy for $40 every six months.

 

Since this was a refinance, were you even upside down when you refinanced?

 

I don't mean to criticize, but it sure seems like buying GAP insurance in the first place wasn't the way to go here, but maybe that's because your situation changed significantly.

[Auto_Body_Chick]

You bought a car, bought GAP insurance, then paid it off in 11 months?  Maybe your financial situation changed significantly during the period, but that was a really bad idea, if you had just put enough money down on the car, GAP insurance wouldn't even have been necessary.  Did you check with your insurance company if they offer it?  My insurance company includes it on my policy for $40 every six months.

 

Since this was a refinance, were you even upside down when you refinanced?

 

I don't mean to criticize, but it sure seems like buying GAP insurance in the first place wasn't the way to go here, but maybe that's because your situation changed significantly.

<{POST_SNAPBACK}>

 

When I purchased that car I had horrible credit in the 500's all the way across the boards. I purchased a 2002 Grand AM 4 Cyl. I financed with Road Loans for 18%. (BK = 1998, inaccurate reporting, etc) I didn't even make a dent in the balance after 1 year. I refinanced with CRAP ONE for 13%. 1 year later WFS offered me 9.9% for 48 months and I took it. I was told that I HAD to buy the GAP insurance to get the loan, which is BS. It says in the contract that I didn't have to. I just didn't read it carefully, I was happy to refi my car. After 1 year, my 20,000 car was only worth $10,000. I attribute that to the rebate incentives that GM offers. I was flowers backwards in that loan. No matter what I did, there was no way to make it better. I only got $8000 for the car when I sold it in March.

 

My new scores are in my signature, after a year of CB!

 

I now drive a 2005 Honda Accord EX V6 w/ Navigation System @ 5% interest.

 

It was worth it IMO to get rid of the Grand Am, it had about 55,000 miles on it and quite frankly, I was sick of it.

 

Oh, well. It was worth it.. I was just a little irritated about the refund.

They were not returning my calls after 11 weeks. I paid off the car late March.

I wanted to make sure that they were not trying to screw me around. They couldn't tell me WHY my refund was only $197.00. I'm a numbers person, I want to know HOW they arrived at that amount. I hate WFS Financial, the customer service SUCKS! I had to call the office of the president today and threaten to call the BBB. Well, what do you know??? The check will be Fed-Ex'd to me tomorrow. The girl at the Office of the President was able to take care of in 5 minutes what I have been trying to accomplish in 11 weeks.

 

Thanks for all the info!

[mk_378]

I think that you're lucky to get any refund at all. Unless your state law requires it they don't have to give any. In the future request a GAP refund as soon as you know the car is no longer "upside down" as the GAP is worthless to you after that point.

 

It appears that they are using a daily calculation version of the "rule of 78". The traditional Rule of 78 is based on time measured by months and works like this. You had a 48 month contract. The amount of premium spent out in the first month is 48 times that spent in the last. To find the last month's premium you divide the total premium by a factor of:

 

48 + 47 + 46 + 45 .... + 4 + 3 + 2 + 1.

 

which is the total "share" added up over the full term.

 

Now the 78 comes in because 12 + 11 + 10 + 9 + 8 + 7 + 6 + 5 + 4 + 3 + 2 + 1 = 78. If its a one year contract the factor is 78. For two years, 300 (12 * 12 + 78) + 78. For 3 years, 666 (2 * 12 * 12 + 78) + 300 and for 4 years, the factor is 1176 from (3 * 12 * 12 + 78) + 666.

 

So on the first month you use 48/1176 of the total premium, second month 47/1176, third month 46/1176 and so on. If you go cancel after 11 months, you pay (48 + 47 + .... + 39 + 38)/1176 = 473/1176 or 40.22 percent of the total premium. Thus your refund is 59.78 precent of $399 or $238.52. Subtract 40 bucks in fee (which could have been $399 in fee if they wanted to) and you have $198.52 -- in the ballpark of what they came up with. However it appears they calculated on a daily basis instead of monthly so the result is slightly different, though the concept is the same.

[Auto_Body_Chick]

I think that you're lucky to get any refund at all.  Unless your state law requires it they don't have to give any.  In the future request a GAP refund as soon as you know the car is no longer "upside down" as the GAP is worthless to you after that point.

 

It appears that they are using a daily calculation version of the "rule of 78".  The traditional Rule of 78 is based on time measured by months and works like this.  You had a 48 month contract.  The amount of premium spent out in the first month is 48 times that spent in the last.  To find the last month's premium you divide the total premium by a factor of:

 

48 + 47 + 46 + 45 .... + 4 + 3 + 2 + 1.

 

which is the total "share" added up over the full term.

 

Now the 78 comes in because 12 + 11 + 10 + 9 + 8 + 7 + 6 + 5 + 4 + 3 + 2 + 1 = 78.  If its a one year contract the factor is 78.  For two years, 300 (12 * 12 + 78) + 78.  For 3 years, 666 (2 * 12 * 12 + 78) + 300 and for 4 years, the factor is 1176 from (3 * 12 * 12 + 78) + 666.

 

So on the first month you use 48/1176 of the total premium, second month 47/1176, third month 46/1176 and so on.  If you go cancel after 11 months, you pay (48 + 47 + .... + 39 + 38)/1176 = 473/1176 or 40.22 percent of the total premium.  Thus your refund is 59.78 precent of $399 or $238.52.  Subtract 40 bucks in fee (which could have been $399 in fee if they wanted to) and you have $198.52 -- in the ballpark of what they came up with.  However it appears they calculated on a daily basis instead of monthly so the result is slightly different, though the concept is the same.

<{POST_SNAPBACK}>

 

 

WOW! Thank you so much for spelling that out for me.

I know that they didn't HAVE to give me a refund. I'm just glad that you understand how they came to that amount. It was really hard for me to understand. I still am kinda lost, but as long as you came up with approx. the same number, I feel good about it.

 

 

Thanks

[M23]

I found your post so amusing because earlier today my DH and I were having a nostalgic discussion about 'The Rule of 78'. The last time we bought a new car was in the late 1980's and back then ALL dealers and banks used the 'Rule of 78' when they calculated auto loans.

 

Eighteen years later, we are still annoyed with this banker's trick. There was no incentive to pay off the loan early because most of the interest was paid up front.

 

At the time we were lucky to negotiate a very good interest rate - 9.25%. Yes, this was a great rate because mortgage interest rates were at 18 percent!

[MarvBear]

if you will run an ammortization schedule on a simple interest loan, the same is true that most of the interest is paid up front also.

 

It is a common misconception.

 

Banks do such a wonderfull snow job on folks!

[mk_378]

This thread started with a refund on insurance, which they could compute any way they wanted to, even to the point of having no refund. Now that loans have been mentioned, rule of 78 loans are a bad deal. Insist on simple interest. Only if you make all the standard payments on time, the two will cost the same. Anything that leads to paying off early will cost more under the rule of 78.

 

True with any loan you pay much more interest up front. The rule of 78 is an approximate formula for how a loan amortizes. It is easy to do by hand compared to a true amortize. The approximation of the rule of 78 causes even more interest to be paid up front. That's why they still use it even though computers now can easily compute an exact result under simple interest rules.

 

In order to pay off all at once, such as with an inheritance, selling the car, or refinancing, the rule of 78 will cost more than if you had simple interest. Not a lot more, but it is more. Basically the rule imposes a hidden pre-payment penalty.

 

But where you really get burned is trying to pay a little extra per month. With simple interest, the extra payment reduces the principle, which immediately reduces the interest paid in every subsequent month. The rule of 78 charges the same interest every month until the loan is completely paid. Your only benefit is a refund of the last few month's "interest"(*), which is tiny compared to what you would save paying extra every month on a simple interest loan. Also of course for a given (higher than standard) monthly payment, it will take longer to pay off a rule of 78 loan than a simple interest one.

 

(*) Remember that rule of 78 loads the interest up front. So the "unearned interest" refund due from paying off a little early is less than the actual interest that would have been due those last few months.

Edited June 16, 2005 by mk_378

[MarvBear]

for Loans the following is still true to the best of my knowledge.

 

In the United States, the Rule of ’78 is outlawed for loans five years or less in the following states:

 

Arizona

Minnesota

Delaware

Nebraska

Idaho

Nevada

Iowa

New Hampshire

Kansas

New York

Maine

Oregon

Maryland

South Dakota

Massachussetts

Vermont

Michigan -

[mk_378]

Not enough states on that list if you ask me. I think they are illegal everywhere (Federal law) if for more than 60 months, or if secured by real estate.

 

Here are some numbers to show why you don't want rule of 78 loans. Consider a 48 month loan for $10,000 at 16% APR. Simple interest or precomputed (rule of 78), the payment will be $283.41 in either case. Making the 48 standard payments, the total of payments will be $13603.20.

 

Now if you were to pay $351.58 per month on the simple interest loan, it would be paid off in 36 months with a total of payments of $12656.44. This saves $946.76 over making the 48 smaller payments.

 

Pay that same $351.58 on the precomputed loan and you'd need 38 payments of $351.58 plus one payment of $243.16. After that, the company will send you the title along with a nice refund check for the 9 months of "unearned interest" -- $137.88! Not so nice after all. This refund is the entire savings for making the larger payment. You'll save almost 7 times more -- or $809.32 more by having simple interest instead of a precomputed loan in this case.

 

Here's another possbility. Pay only the standard payments and trade the car in after 36 months. Payoff for the simple interest is $3123.63. Payoff for precomputed is 3400.80, with a refund of 238.99, netting 3161.81. Not a huge difference but precomputed always costs more. $38 more in this case.

[Auto_Body_Chick]

for Loans the following is still true to the best of my knowledge.

 

In the United States, the Rule of ’78 is outlawed for loans five years or less in the following states:

 

Arizona

Minnesota

Delaware

Nebraska

Idaho

Nevada

Iowa

New Hampshire

Kansas

New York

Maine

Oregon

Maryland

South Dakota

Massachussetts

Vermont

Michigan -

<{POST_SNAPBACK}>

 

Well, I am in IL and the GAP Insurance company is in CA.

 

Does that mean what they did was illegal? How could I find out for sure?

[MarvBear]

for Loans the following is still true to the best of my knowledge.

 

In the United States, the Rule of ’78 is outlawed for loans five years or less in the following states:

 

Arizona

Minnesota

Delaware

Nebraska

Idaho

Nevada

Iowa

New Hampshire

Kansas

New York

Maine

Oregon

Maryland

South Dakota

Massachussetts

Vermont

Michigan -

<{POST_SNAPBACK}>

 

Well, I am in IL and the GAP Insurance company is in CA.

 

Does that mean what they did was illegal? How could I find out for sure?

<{POST_SNAPBACK}>

 

 

You need to read the post carefully. The post references LOANS not the selling of the product and the method of refund.

 

A loan can be calculated either via simple interest or Rule of 78's (which is a rarity nowadays).

 

Product cancellations are an entirely different matter.