"Wobbles the Mind" (wobblesthemind)
02/19/2016 at 16:50 • Filed to: Financing
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"Wobbles the Mind" (wobblesthemind)
02/19/2016 at 16:50 • Filed to: Financing | 1
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After reading many articles on why you’re the worst kind of scum on the planet if you aren’t maximizing your retirement portfolio, I realized that most financial advice isn’t geared towards surviving your 20s (or 30s). Thus, I embarked on a mission to try things out, learn from my mistakes, and share my successes. I’ll keep this one quick and easy:
Don’t Pay for Lower Interest Rates
This is especially prominent on loans that are “small” and short term. Let’s do a fairly normal automotive purchase of an $8,000 loan. The most vocal people will cry out, “What kind of Pillow-Cuddler doesn’t pay that amount in cash?!” We’ll ignore this and pretend that $8,000 is a lot of money, because thousands of dollars tends to be a large chunk of cash. Hell, most of us men wouldn’t drop $40 on a haircut from the guy that fades up Jay Z.
Well you stroll into the dealership with your Credit Union’s $8,000 loan approval at 1.99% APR over 48 months for your vehicle which must be between model years 2004-2006. The dealer graciously notifies you that they have a lender willing to give you 0.99% interest for the same 48 months and is only asking for a $200 down payment (which they can roll into the financing, you know, for your convenience).
Well using a handy Amortization Calculator, we find out that if we make the minimum $173.53 payment a month for 48 months @ 1.99% APR, we will end up paying $329.25 in interest over those 4 years.
Well the Dealer was kind enough to let us know that the same 48 month term @ 0.99% APR will only cost us $162.74 in interest over those 4 years (if we stick to that $170.06 a month payment). That’s less than half the cost of our Credit Union’s loan!
So far so good? Better rate is obviously better, no?
Well if you paid that $200 down payment in cash that day, you will have actually spent $362.74 for that “better” rate over the life of the loan. In fact, that Lender pretty much treated you as a Zero Down Payment shopper accepting a 48 month term @ 2.19% APR. Your monthly payment would have been $174.23 at that rate. Total interest would be $362.81 , the difference of which is less than the amount change between your passenger side seat cushion.
If you allowed the Dealer to roll that $200 payment into your loan, your monthly payment would become $174.31 a month for 48 months @ 0.99% APR. The total interest you would pay if you kept to that payment is $166.81. That still comes across as less than half the total interest charge on the original Credit Union term you came in with. That said, let’s see the total you will have spent with each method.
$8,000 loan. 48 months @ 1.99% APR =
$8,329.25
$8,000 loan ($200 down). 48 months @ 0.99% APR = $8,362.74
$8,200 loan. 48 months @ 2.19% APR = $8,362.81
$8,200 loan. 48 months @ 0.99% APR = $8,366.81
In other words, your original Credit Union gave you the best rate. Actually, if you look at the differences between the totals, your CU gave you a significantly better rate! Of course all the numbers change at higher APRs, larger transactions, longer terms, and paying over the minimum payments each month. However, those that got a loan for less than 1% interest is going to be bragging about it and will happily go to that Seller and Lender again. The $200 won’t even be remembered after the drive off the lot.
I know these numbers are relatively small, however I wanted to be realistic to what 20-somethings will have happen to them. The numbers are so “small” no one would catch them readily, and even if noticed, most of us would ignore them. All a good salesperson has to do is point out the most beneficial numbers.
“Wow, you have some of the best credit I’ve seen! I’m surprised your Credit Union has you paying 1.99% interest . I have a lender that is willing to give you an interest rate below 1% , all they request is $200 down. With your CU, you’ll pay more than double the interest over the term!! Let’s set you up with this Lender, I bet they’ll even roll that $200 down into the loan and we’ll get you out of here in that gorgeous 2004 Lexus GS300 without you having spent a dime today! New car, no money? I’m glad I brought my lunch or else I wouldn’t be eating today!” *shakes customer hand with generous abandon*
The same trick can be done by having customers roll their tax, title, fees, warranty, destination charges, and so on into their loans. It makes it much easier to create lower interest rates by having people finance enough to cover the difference. This is why Dealerships and Lenders can make a hell of a team while keeping a buyer excited over the whole experience. Even better when for all parties when the Lender is the Automaker!
By the way, if you are a seller, you can get most people to take a $500 to $1,000 loss on their trade-in if you offer a 0% interest rate . Since it’s “ free money ,” most people will also buy a higher priced vehicle as well. Either way, easy cash and the customer still feels like you did back flips in order to secure the best rates just for them.
BrianGriffin thinks “reliable” is just a state of mind
> Wobbles the Mind
02/19/2016 at 17:13 |
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Wouldn't $8k with $200 down be a loan amount of $7,800? How does less of an amount at a lower interest rate end up costing more? Or am I misunderstanding your math?
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Wobbles the Mind
> BrianGriffin thinks “reliable” is just a state of mind
02/19/2016 at 17:40 |
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The term down is used but the $200 charge is a fee for the lower financing. The $200 down doesn’t go to vehicle but to the interest. Same way a $600 phone is $20 a month for 24 months @ 0% APR AFTER $129 down in order to start service.
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BrianGriffin thinks “reliable” is just a state of mind
> Wobbles the Mind
02/19/2016 at 19:00 |
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Fair enough. I've never heard of financing like that; kinda like points on a mortgage.