*d$$$j$g$T$$/˙ ń H d ˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙0i˙˙˙˙ ˙˙˙˙# ˙˙˙˙g˙˙˙˙˙˙˙˙˙˙˙˙i(˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙ ˙˙˙˙˙˙˙˙f˙˙˙˙˙˙˙˙$%ň&ň'((
đB)'*˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙-ˇ˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙˙qqD˙'LOW_PCT.WK1 - Auto loan gimmick "3.9% financing or $1500 off"C˙' - Copyright 2001, 2002 Joel Anderson3˙' The crime of the poor is stealing,0˙' the crime of the rich is fraud.<'"3.9% financing or $1500 off" is a gimmick where some?'interest is disguised by including it in a higher price.;˙ 'Q: If I take the dealer's low-rate financing, how;˙
' does that compare to taking the price discount6˙' and getting the financing somewhere else?A˙
'A: Calculate the dealer's real interest rate. Then you can<˙' shop for alternative financing by comparing rates.;˙' You're giving up a $1500 discount on price to get@˙' the 3.9% low-rate financing. By law (Truth in Lending)<˙' and logic, the $1500 price difference is interest.9˙' Calculate the interest rate on dealer financingC˙' using the known facts: $1500 prepaid interest, plus 3.9% =˙' on the loan balance. (Discounted cash flow, below.)0˙'About low interest rate dealer financing:?˙' Auto companies and dealers know the value of money.>˙'They also know that most customers lack the mathematicsD˙'to calculate the true interest rate on the financing offered.<˙'Finding the best financing is the customer's problem.>˙' Low interest rate financing is a discount on price.?˙'Low interest rate advertising often doesn't disclose the>˙ 'equivalent cash discount a cash customer would receive.=˙!'Dealers leave the cash-equivalent-discount calculation;˙"'to the cash customer. It can be done. You can do it.˙$\=˙$\=˙$\=˙$\=˙$\=˙$\=˙$\=#˙&'In the example below, given:>˙'' 1. The vehicle can be purchased for cash, for $19,500@˙(' 2. The vehicle can be financed for $21,000 ($1500 more):˙)' 3. The term offered is 3 years (i. e., 36 months)3˙*' 4. The downpayment is $3000 (20% down +/-);˙+' 5. The interest rate is 3.9% (APR, a nominal rate)@-'In this example, "3.9% financing or $1500 off" is really A.'9.77% (APR) financing, true rate 10.22% (APY). A trade-in,;/'or increasing the downpayment, would raise the rate.?˙1'The difference between the cash price and financed price@˙2'is $1500 in prepaid interest. Plus 3.9% (APR) interest onE˙3'the loan. Calculate the cash-eqivalent value of the 3.9% loan.A˙4'Calculate the 3.9% loan's payments (using @pmt). Enter the@˙5'cash value of the loan and the 3.9% loan's payments into 5˙6'a discounted cash flow calculation. See below.<˙8'Understanding the term (lenght) of gimmick financing:E˙9' Shortening the 36-month term (to 24 months) would raise the A˙:' rate. Lenghtening the term (to 48 months) would decreaseA˙;' the rate. This is because the overall interest charge is>˙<' a combination of prepaid interest (amortized over theD˙=' the term), and regular interest (paid by monthly payments).=˙>' The interest charge scheme explains why the terms of%˙?' gimmick financing are rigid.D˙B'Calculate the interest rate on dealer offered 3.9% financing: ˙D'1.-˙D'Calculate the amount of the 3.9% loan:(˙E'Vehicle price with 3.9% financing
˙ER˙F"- downpayment
˙FHô˙G\=˙G\=˙G\=˙G\=˙G\= ˙H"Loan amount with 3.9% fin˙HŃ@ýżţżP ˙J'2..˙J'Calculate the payment on the 3.9% loan:˙K"Rate APR (decimal)
˙K+ŮÎ÷Ł?˙L"Term (months)
˙L$&˙M"Loan Pmt with 3.9% financing =$MóŁ
@űżţż˙ż8 ˙O'3.6˙O'Calculate the eqivalent cash value of the loan:(˙P'Vehicle price with 3.9% financing
˙PR˙Q"- cash discount
˙Q$ú˙R"- downpayment
˙RHô˙S\=˙S\=˙S\=˙S\=˙S\="˙T"Cash value of the 3.9% loan˙TĐ@üżţżP ˙V'4.6˙V'Use discounted cash flow [DCF] to determine the8˙W'nominal (APR) rate and the true rate (APY) on the ˙X'dealer offered financing.:˙Z'Lenders quote rates in APR. APR is a nominal rate, 8˙['that is, a rate in name only. APY is a true rate.%˙\'APY is the real cost of money.=˙^'In the example below: if you're extending the range of:˙_'payments, include all the payments in @IRR's range.>˙a'Note: the first value in a DCF calc is always negative.9˙b' Initialize the account by borrowing from it.,˙d'The discounted cash flow calculation:˙f'Term
˙f"APR
˙f"APY,ggp÷k#@d{ŽGáz?&Y5g2nm p$@&d{ŽGáz?˙ż˙ż&Y
-˙g'Interest rate, dealer's 3.9% financing
˙h'Mos
˙iiĐŔëż˙i'Cash value of 3.9% loan
˙jjóŁ
@M˙j'Pmt on 3.9% loan
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