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Frequently Asked Questions
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Is a 0% Loan subject to Federal Reserve Regulation Z? Can't I just divide the loan amount by the term to get the payments? Can I sell credit life insurance and disability insurance on 0% loans? Can I calculate the dealer reserve (interest buy-down) on a 0% loan? Can I calculate the dealer reserve (interest buy-down) on a 0% loan? |
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Is a 0% Loan subject to Federal Reserve Regulation Z? Yes. Even though there is no interest, it is still a loan and must be disclosed in accordance with Regulation Z. The Finance Charge must be correct (in this case, precisely $0.00), the A.P.R. must be within tolerance, and all the other requirements of Regulation Z must be complied with |
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Can't I just divide the loan amount by the term to get the payments? Sort of. If there is no credit insurance, no tax, etc., and you already know the exact amount financed, then you can divide it by the number of payments to get the approximate payment. Of course, the payment rarely comes out to an even cent, so it has to be rounded to a whole cent. This rounding causes a small error in the total of payments. For example, a 0% loan for $5,000 over 36 months yields a payment of $138.88888889. This is rounded to $138.89. But, unless you adjust the final payment, the total of payments will be slightly more than the original $5,000.00. To properly disclose the loan, you need to show 35 payments at $138.89 and 1 payment at $138.85. Doing a 0% loan by hand opens the door for any number of errors to be made. Even a small error is often enough to have the entire contract "bounced" by the lender. The typical cost of a single bounced contract is $75 or more, not to mention the aggravation and bad effect on customer relations. Upgrading your 627B LeaseMaker calculator is an inexpensive way to make sure your contracts are correct. |
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My loan documents and/or document printing software only have room for one payment amount. How can I disclose a 0% interest loan? If you don't have room on your loan agreements or document printing software for two payment amounts, you can solve the loan "backwards" with the 627B LeaseMaker to find the loan amount. First, calculate the payment from the loan amount using a 0% interest rate. Then, change modes (push the Mode key) so the calculator will find the price and loan amount. Push the Loan Rework key and keep the payment amount and other entries. The price and loan amount will be adjusted adjusted up or down by a few cents to make sure the finance charge is exactly zero. Using the above example, the loan would be disclosed as 36 payments of $138.89 each, and the loan amount would be adjusted to $5,000.04. |
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Can I sell credit life insurance and disability insurance on 0% loans? Sure. But in many states which require net credit insurance, special formulas have to be used to compute the life premium. The regular formulas won't work with a 0% interest rate. The new 627B LeaseMaker has these additional credit-life formulas so you can compute credit life on 0% loans in all states. Detailed information about credit insurance calculations for the 627B LeaseMaker are in the LeaseMaker Guide to Credit Insurance. |
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Can I calculate the dealer reserve (interest buy-down) on a 0% loan? Yes. You can discount a 0% loan using the dealer reserve routines by either the difference in charges or present value method. If you're a lender, you can use the new APRChecker routine in the 627B LeaseMaker to check and discount 0% loans. This allows a dealer to offer 0% loans through any lender willing to accept an interest buy-down payment. Our APRChecker PC program has also been updated to check and discount 0% loans. |
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What about early payoffs of a 0% loan? Lenders should love 0% loans because there is no refund for early payoffs. Because the borrower is paying no interest in the first place, he's not entitled to a refund for early payoff. This means the lender and dealer have no exposure due to early payoffs. |
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Can I calculate 0% balloon loans? Yes, the new 627B LeaseMaker balloon routine will compute 0% balloon loans. Instead of adjusting the last regular monthly payment, the balloon payment itself is adjusted up or down a few cents, if necessary, to make the finance charge exactly equal 0. You can discount 0% balloon loans with the dealer reserve routine. |
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