One central Ohio woman shared her story after she was caught in a simple interest loan trap.
With a growing family and recent bankruptcy, Stacey Casebolt-Sparrow was certain she could never finance another car until she found a dealer who offered to help in 2006, Consumer 10's Kurt Ludlow reported.
The dealer steered Casebolt-Sparrow to a finance company specializing in customers with credit problems. They were able to get her a simple interest loan.
"They just said 'This company will approve you.' We just filled out the paperwork and signed it. So didn't we didn't have to fight it get financing. It was simple," said Casebolt-Sparrow.
Casebolt-Sparrow bought a 3-year-old Ford Taurus for $8,700 with the loan. The contract called for payments of $235 a month for 66 months, at a 22.9 percent interest rate.
"I knew the interest rate was high, but I assumed as long as I made those payments the car would be paid off," said Casebolt-Sparrow.
After making $14,000 in payments over the past five-and-a-half years, Casebolt -Sparrow called to get the final payoff.
"I've paid the amount that's on there, that looks like it should be paid off now and I still owe another $5,000," said Casebolt-Sparrow.
Ohio State University law professor Vincene Verdun said simple interest loans can be misleading, Ludlow reported.
"The interest is calculated based on the face amount of the loan and frequently it's spread over evenly throughout the whole life of the loan," said Verdun.
If you make every payment on time, you will pay off the car in the time frame described in the contract. However, if you make even one late payment or get payment extensions, it can dramatically affect the balance due, as Casebolt-Sparrow discovered.
The most important thing about simple interest loans is to ensure payments are made on time, or even early. And don't take payment extensions, especially if you have had credit problems and are paying a high interest rate, Ludlow reported.
Paying off the loan early will save money. It is also important to make sure you read and understand the loan contract you sign.
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