First let me say that I think that Microsoft Financing is great. It’s easy to get set up as a partner and once set up as a partner it’s really easy to quote/price deals and get them processed.
Today a customer asked me if there is any prepayment penalty. Good question – I thought the answer was no but called Microsoft Financing for the official word. I called and was told ‘no, there is no prepayment penalty’. I was directed to Item 9 – REMEDIES – for the support of this. After I got off the phone I read Item 9 which only talks about defaults. Defaults have nothing to do with what I was asking about. I called back and spoke to someone else that told me ‘oh no, that’s not ITEM 9 – it is ITEM 14 – MISCELLANEOUS. This section does in fact talk about ‘you may prepay …’.
My first career was as an Actuary so I eat up interest calculations.
So, here is the deal. If you prepay a loan early (I think that is redundant), they are going to discount the remaining payments at a 4% annual rate. Now, if the loan were originally calculated at 4% and we are prepaying at DAY 1 before any payments have been made, the amount you would have to pay back would be equal to the amount borrowed – NO PENALTY.
However the going rate for these loans is HIGHER THAN 4%.
In some actual numbers that Microsoft provided to me, a loan of $120,000 was priced at about a 7% rate. So, if you borrowed $120,000 today and decided to pay it back tomorrow – your payment would be $125,481.
Microsoft says that this is not a penalty for prepayment but I tend to think they would have to do a LOT of singing and dancing to get a customer to understand this.
Microsoft should either
1) calculate the loan payoff using the same rate to discount remaining payments as the rate the original payments were computed with or
2) instruct their service people to NOT tell partners and/or customers that there is no prepayment penalty since we all call $5,481 a PENALTY, regardless of what MS’s wordsmiths and lawyers call it.
BTW – Did you know that the US has 2% of the world’s population and 50% of the world’s lawyers?