February · 1996 -- Volume 13 Issue 1
State Law Changes
Other items of interest...
- of Interest Back Issues Available!
- Carleton Web Site
- From our Research Department... The "Elusive Final Payment" - Part II
- About Carleton, Inc.
State Law Changes...................
* MICHIGAN *
Effective: March 28, 1996 *** Law Type: Consumer Finance
The Credit Reform Act has set new limits for maximum loan amount, interest, time price differential charges, and delinquency charges.
Regulatory Loan Act
Maximum Loan Amount - Raised to $15,000 from current $8,000.
Maximum Charge - Increased to 25% simple interest from 22%.
Maximum Delinquency Charge - Increased to $15 or 5% of the unpaid installment payment from the current maximum of $5 or 5% of the unpaid installment payment.
Retail Installment Sales
The maximum time price differential will be 25% per year. The present maximum is a split add-on rate structure of 12% of the amount financed up to $500 plus 10% on the amount exceeding $500.
Motor Vehicle Financing
The maximum charge on the installment sale of a motor vehicle will be 25% per year simple interest. Currently maximum rates are set by class of vehicle.of Interest!
of Interest! Back Issues Available!
We have a limited number of back issues available for the asking. Give us a call if you have missed any recent issues. The following topical index highlights the accompanying Research Department article in that particular issue.
Oct 1995 - The "Elusive Final Payment" (Part 1)
Sep 1995 - "A Fee is a Fee...Or Is It?"
Jun 1995 - The "February Follies" Part III
Apr 1995 - The "February Follies" Part II
Feb 1995 - The "February Follies" Part I
Dec 1994 - Contemplating the EMR
Oct 1994 - The Proper A.P.R.
Aug 1994 - A Carleton Quandry... T-I-L A.P.R. Disclosures
Jun 1994 - Telling Time
Apr 1994 - A Question of Coverage (Part II)
Dec 1993 - A Question of Coverage (Part I)
Carleton Web Site
Do you have an e-mail address or a site on the World Wide Web? Carleton is constructing a web site where you will be able to: receive online customer support for frequently-asked questions; keep up-to-date on upcoming law changes between issues of our of Interest!; read excerpts from our research reports; and more!
To help us continue to provide you with the best customer service possible, please send us (by mail or FAX - * we're not up yet!) your address and/or URL. We'll keep you updated on our progress.
* Webmaster's note: This issue was published before we had a Web site. It's here now (or you wouldn't be reading this!!!) We do, however, plan to continually add new material to it, so please visit us again soon.
From Our Research Department........
The "Elusive Final Payment" -- Part II
In our October issue, we looked at a live transaction submitted by a customer which contained 35 payments at $188.37 and a final payment amount that was left in question. We received a number of "possible payments" from readers. In this issue we will share our views on the "best" of the prospective final payments offered.
First though, let's review the vital information concerning this transaction.
Contract Date June 1, 1995 First Pmt Date July 1, 1995 36 month transaction term $5,000 Amount Financed 21% Simple Interest Rate 1 month to the 1st payment date 35 regular payments of $188.37
If you are a regular reader of this publication, you know that we often present example transactions built on supposition, that we may or may not fully explain at the onset, in order to highlight a point. This time is no exception. The "best" final payment, in our estimation, of the 15 offered is any of the first 12. The determining factor of which is "better" is the actual contract date and the corresponding scheduled first payment date. The 15 options are:
Possible Final Payment
(1) $190.21 (2) $192.50 (3) $189.37
(4) $186.26 (5) $188.47 (6) $185.34
(7) $187.51 (8) $184.38 (9) $181.21
(10) $194.00 (11) $190.96 (12) $193.24
(13) $188.37 (14) $188.63 (15) $200.01
In this particular instance, the transaction was interest bearing, often referred to as a "simple interest transaction", and the interest computation method employed was what we label "actual days between payments". A more common description is that interest is computed according to a 365 day year calendar with a daily rate of 1/365 (365/365). (For more specific delineation between time counting methods, see Carleton Research publication X-0565, Time Counting for Consumer Credit Transactions.)
The final payment was computed through amortization and was a function of the profile of the actual number of days between each scheduled payment period. To put it another way, it was a function of the number of 31 day months contained within the life of the contract.
For example, a final payment of $190.21 is associated with a contract date of June 1 and a first scheduled payment date of July 1. Actually, any payment date in June to the corresponding date in July will produce that final payment. When the contract date changes to July and the scheduled first payment date is the corresponding date in August, the final payment is $192.50, and so on. Table 1 shows the appropriate final payment for the given dates.
| Contract Date | 1st Pmt Date | Final Payment |
|---|---|---|
| 06/01/95 | 07/01/95 | $190.21 |
| 07/01/95 | 08/01/95 | $192.50 |
| 08/01/95 | 09/01/95 | $189.37 |
| 09/01/95 | 10/01/95 | $186.26 |
| 10/01/95 | 11/01/95 | $188.47 |
| 11/01/95 | 12/01/95 | $185.34 |
| 12/01/95 | 01/01/96 | $187.51 |
| 01/01/96 | 02/01/96 | $184.38 |
| 02/01/96 | 03/01/96 | $181.21 |
| 03/01/96 | 04/01/96 | $194.00 |
| 04/01/96 | 05/01/96 | $190.96 |
| 05/01/96 | 06/01/96 | $193.24 |
The payment of $188.37 is, of course, the disclosed final payment if all intervals are treated as equal and $.26 is waived to achieve level payments.
The payment of $188.63 represents including the final balance rather than waiving it to produce equal level payments.
The payment of $200.01 is our ever present "red herring". It was different enough to make some think twice about what they thought was the right answer.
The point to be made is that computational differences do exist when comparing "simple interest" and precomputed transactions, not just payment posting or bookkeeping features. Unlike traditional precomputed computations, "simple interest" computations are dependent on the profile of the number of days in each month during the transaction. Unfortunately, space does not permit us to explore all of the ramifications of moving from a precomputed environment to one of "simple interest".
If you would like a copy of our recently completed Research Study "Understanding Daily Simple Interest Contract Calculations", give us a call and ask for X-0568.
Distribution of this newsletter is made with the understanding that the information contained herein has not been certified as legally acceptable for any particular statute, law, or regulation. For more timely and detailed information, subscribe to our Consumer Finance Newsletter and/or The Cost of Personal Borrowing in the United States compliance guide which are both published and updated ten times a year.
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