>He paid $27,000 for the car, less than the sticker price, but took out a $36,000 loan with an interest rate of 1.9%
Isn't that pretty good? 1.9% is at inflation, so it's almost a free loan.
Isn't that pretty good? 1.9% is at inflation, so it's almost a free loan.
From my understanding, what is used is called an "opportunity cost". Meaning, if I took this loan rather than pay off the car, I now have $36,000 in my possession that I would not have otherwise. I have to be able to make more than %1.9 off the money I spent over seven years for that loan to have been worth it.
So let's say I just store $36,000 in a savings account that had a yield of less than %1.9 and used that to pay off the loan. I am still losing money on the deal. If I put it into some sort of investment that made more than %1.9, then I make more money than if I spent it entirely on the car.
This is at least my understanding of how it works out. I welcome other's thoughts if I am wrong.
I am trying to answer the question posed, which was "is this a really good loan?" I took that to mean "If I have the money to buy the car, is this advantageous enough to take a loan anyways?"
In short, the loan is a great deal if the terms of the loan did not affect they buyer's willingness to pay more for the car.
a) You have that sort of cash on hand. b) You do NOT miss payments.
If you miss payments, they typically have late/collection fees against you (I don't know how bad they are) or repossess your car depending on the situation. I assume both are structured to be advantageous to the dealer (I don't know specifics).
Also, it is in the dealer's interest to make the loan as long as possible, as this makes the advertised monthly payment as low as possible.
In addition, making the loan payments as low as possible helps decouple the true cost of the car from the buyer. This encourages more spending that otherwise would not happen.
Who should be held responsible for a bunch of molecules in your brain making you feel good about buying something you shouldn’t have? Who’s to say what you should and shouldn’t have bought?
I honestly don't care what people spend their money on. I may think it's a bad idea, or it's even stupid, but I'm far from arrogant enough to think that I should in some way, work to "protect them from themselves."
Did he finance amount due on the trade? Oooh, that's a huge no-no.
(I didn't go past the paywall.)
Dumb stuff like this happens across the country, at a wide range on incomes, and on more than just cars. It really is a problem with education - people simply don't understand interest rates, loans, or general financial planning/budgeting.
Yes, the $9k excess was from previous vehicles (the article says he had two previously).