0% – 2.5% Finance Is The Worst Kind Of Debt!

Here is the greatest trick the car industry has ever played on the public!

Roll Up Roll Up, get your money for free !!!  0% or 2.5% financing is available for YOU, but be quick because its a special deal and YOU qualify!
For some reason, people are prepared to believe this continuing story, even justifying it by saying things like ” oh they must be getting cheap money from overseas…it’s a Japanese/US/German company don’t you know, interest rates are much less there”.

Rubbish. Here is what they do:

magic-hatEach time these ‘finance specials’ are offered they are linked to certain models that need run-out.  What that means is that the car company wants to move these car types and allegedly financing at cheaper rates is one way to get people interested.  Also, the finance is linked to specific terms.  So, you can only get the finance on certain models and only over say 3 years at a 30% residual value.  This all sounds fine, I mean why shouldn’t they give you cheap finance on a model they want to move and over a certain term?   Well actually they don’t.

The way it’s done is to add what would normally be the financing costs into the price of the car.   There will not be any negotiation on that price, or at least certainly not to the level you could normally achieve by offering to buy the car using other types of finance or cash.      What follows here is just one example of a vehicle bought with 2.5% finance versus 8.75%.   Notice anything?

The purchase price of our vehicle is approx. $7,000 less than the ‘cheap finance’ model.  Same car, same specifications.  That’s the trick!!   As a consumer you think you have no right to negotiate because they are giving you such a good deal on the finance.   Yet, at normal interest rates, the repayments are less per month and the total cost over the term is less.   Then of course there is the negative equity you might be creating.    Read on under this table below to find out how that keeps you in debt.

Interest Rate Interest Rate
2.50% 8.75%
Retail Price $47,500 $40,740
Less Trade $6,000 $6,000
Changeover $41,500 $34,740
Est Fee Unknown $400
Amount Financed $41,500 $35,140
Repayment 36  x  $753 36  x $748
Balloon $14,525 $14,250
Total Cost $41,633 $41,178
8.75% Cheaper By $455
Let’s forget financing for just a moment and talk about the purchase price and how this will keep you in debt.

Negative Equity is a term used to describe the situation when someone wants to replace their vehicle but the amount they owe is more than the current value of the vehicle.    Let’s take the above situation as an example and assume that you have purchased the vehicle on 2.5% finance at a purchase price of $47,500 and financed it at $41,500 after your trade.  I have purchased my vehicle at $40,740 and financed $34,740 after a similar trade.

In 2 years time, lets say the cars are worth $20,000.   Who do you think will be in situation of negative equity?

Your payments of $758 x 24 months = $18,192.   So, in very simple terms you still owe $41,500 less $18,192 = $23,308

My payments of $748 x 24 months = $17,952.  I still owe $35,140 less $17,952 = $17,188.00.

So, if the car is worth $20,000 then I am about $3,000 ahead of my debt and you are $3,300 in negative equity.  Your cheap finance deal puts you $6,300 behind my position.  This is all because you took a higher retail price that included the financing costs, and then you paid 2.5% on that amount as well.   Not only are you paying interest on interest, but your purchase price keeps you in debt.

Don’t worry, I’m sure they will give you a higher trade on your vehicle on the next one…………….

 

If you want to get the right financing, with the right structure, without all the smoke and mirrors, e-mail or call us.

 

 

 

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