Your car which has market value of 7000 is damaged in a hail

Your car, which has market value of $7,000, is damaged in a hail storm, and the insurance company gives you a co-payee check for $1,500. You decide not to repair the car, and you take the check to the co-payee, GMAC. GMAC states that the check will be applied to the unpaid obligation, which is 36 remaining monthly payments of $150. (The GMAC financing plan reflects an effective interest rate of 12%). The GMAC plan for ($1,50/$150=10 payments). The GMAC records indicate that the pay-off on your 12% loan is 4,516.12, before considering the $1,500 check.

a. Would you accept GMAC\'s plan? Why?

b. What enhanced profit for GMAC, and lost benefit for you, would result from the GMAC plan?

c. If GMAC would not consider any other approach that what they have proposed what would you do?

Solution

No, because while installment includes the principal and the interest both, any prepayment should be deducted from the principal itself. But the GMAC is deducting the check amount as installment and not as the from the principal outstanding. So in this case interest is being charged on the amount which is not due and paid right now, when we accept the plan. The interest on the amount of 10 installments (plan) i.e. $403.15 is profit to GMAC and a lost benefit for me. I would get like to deduct the $1,500 from GMAC principal outstanding and make my outstading $3,016.12 (4,516.12-1,500) Installment principal due opening interest included installment amount principal due closing 36 4,516.12         45.16      150.00 4,411.28 35 4,411.28         44.11      150.00 4,305.39 34 4,305.39         43.05      150.00 4,198.45 33 4,198.45         41.98      150.00 4,090.43 32 4,090.43         40.90      150.00 3,981.34 31 3,981.34         39.81      150.00 3,871.15 30 3,871.15         38.71      150.00 3,759.86 29 3,759.86         37.60      150.00 3,647.46 28 3,647.46         36.47      150.00 3,533.93 27 3,533.93         35.34      150.00 3,419.27      403.15 1,500.00