Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, February 10, 1992 TAG: 9202080285
SECTION: BUSINESS PAGE: A-9 EDITION: METRO
SOURCE: Mag Poff
DATELINE: LENGTH: Long
TIMING IS EVERYTHING IN AUTO LOAN RATES
Q: Could you address the advantages of a simple interest auto loan vs. one that requires repayment under the Rule of 78s? We recently purchased a new car and were told very emphatically by the dealership that there was "no difference" between the two loan types. They said banks prefer Rule of 78 loans because it actually saves the customer money. We insisted on a simple interest loan (or, we told them, we would finance elsewhere) and we got it. However, this phrase appears in the contract: "If you pay off the entire balance more than 90 days before the maturity date, a prepayment penalty of $35 will apply."I was under the impression that simple interest means interest is paid on a daily basis and, therefore, there is no prepayment penalty. In other words, you owe interest only for the number of days you borrow the money.
A: The dealership was wrong about one thing. Virtually all major Virginia banks today make car loans with simple interest, which means interest applies only to the declining balance. It is similar to a mortgage. Jerry Kincer, vice president at Crestar Bank in Roanoke, said one reason for this preference is the complexity of the disclosure statement required for loans under the Rule of 78 in which the interest is largely repaid up front.
Kincer said the dealership is correct about one thing, however. The type of loan makes no difference "if you make every payment on the due date and take it to the end of the line." The advantages of each vary with your pattern of payment, he said.
Simple interest is better for people who plan to make lump-sum payments or extra monthly payments. You can prepay a simple interest loan at will, thereby reducing the amount of interest you ultimately pay.
The Rule of 78 favors people who pay late. If a payment is due on the 15th of the month but you pay on the 20th, the overall amount of interest would not change under the Rule of 78. If the loan is at simple interest, on the other hand, you will be charged for the extra five days the payment was late.
Kincer is not aware of any bank that imposes an early penalty fee, although some may have such a charge. Or it may be a charge by the dealership or a financial company.
Get a lawyer, fast
Q: My father has been diagnosed with Alzheimer's and will become a long-term nursing care patient within a few years. My parents had planned for their retirement years and now fear that the cost of long-term care will leave my mother in financial ruin. He is 69 and retired from the telephone company and the Navy. She is 62, has never worked, and is in excellent health. Her mother lived to be 100.
They have $60,000 in savings, $20,000 in stocks, a $20,000 IRA and a house valued at $100,000. The house is paid for and is on the market because they would like to move into a condominium. My mother has obtained a power of attorney.
Is there any advice you could give a couple in their situation? Can you recommend a book to us? Are there ways to legally protect some of their assets? Who should one go to for this type of financial planning?
A: They should consult a lawyer who specializes in estate planning. And they should do this at the first possible moment because time is not on their side. This should be done before the house is sold and before your father is helpless. They will have to pay a fee for the service, but they cannot afford not to do it.
They need a a full estate plan with an irrevocable trust, wills and a durable power of attorney. Durable means that it will survive the maker's mental incapacity. Make sure it gives you or your mother the power to make medical decisions for your father.
Through the so-called Medicaid trust, you father can transfer all of his assets to your mother or, if they can be trusted to take care of your mother, to their children.
Medicaid currently considers only the last 30 months in determining whether assets were transferred in anticipation of long-term care. That means your father would be eligible for Medicaid assistance 30 months after transfer of the assets. He may avoid long-term adult home care for all or most of that time. After 30 months, he would qualify for Medicaid assistance and your mother would avoid becoming impoverished.
You can shield the savings, stocks and IRA in the trust. Their home, car and other personal property can be kept outside the trust because Medicaid excludes those assets from consideration. Make sure their new home is fully paid for, then protect the balance of their gain in the trust. They might want to pre-pay funeral expenses as well.
The steps they take will have tax ramifications that must be considered. And the trust must be established with care.
People who do this in advance of need usually coordinate the plan with long-term care insurance, but this is no longer an option for your father.
Creating a Medicaid trust is not a desirable action because it shifts the burden of your father's care to the taxpayers. But it may be the only way to avoid financial ruin for your mother.
Mag Poff covers banking and finance for the Roanoke Times & World-News. She will help find answers to your personal finance questions. Send them to her at the Roanoke Times & World-News, P.O. Box 2491, Roanoke, Va. 24010. read and return to money basket