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Copyright 2001, 2002, Joel Anderson

Loans: amortization, and "zero- and "low-percent" gimmicks

How most loans work

Text Download spreadsheet
Amortization, with extra principal Loan.WK1
Daily APR, Pmts based on days-in-month Loan_365.WK1

WK1 files will open properly in most industrial-strenght spreadsheets.

LOAN_365.WK1 doesn't open properly in M$ Works 4.5a. It doesn't support the @datevalue function. A later version might. Try it. LOAN_365.WK1 can be viewed in M$ Works 4.5a by striking Okay (many times) to pass the error prompt when it appears. Offending formulas will load as numbers.

There is no free lunch

Auto loan "zero-percent" and low-rate gimmicks:

     The cost of credit (interest) is anything you pay above the cash cost for the alternative to cash, borrowing and making payments over time. See Truth-in-Lending for details.

     The typical auto loan gimmick is low-rate financing or dollars off. 0% financing or $3000 off, 1.9% financing or $2500 off, 4.9% financing or $1000 off, etc..

     If you take the low rate financing, you're prepaying interest in the form of the discount you didn't take.

     With the "zero-percent" gimmick, the larger your downpayment or the more valuable your trade-in, the less credit is extended, and the higher the interest rate you pay.

     In most (if not all) cases, you're better off taking the dollar discount and, if you must finance, finance at a bank or credit union at the same or lower rate. At the same rate because, if your ship comes in (you get a raise) and decide to pay off the loan early, an early payoff of a "zero-percent" loan will increase the rate of interest further still since you've prepaid all the interest but used the borrowed money for a shorter time.

     Find out what you're really paying for gimmick financing. Then shop for a better rate.

Calculate the cost of gimmick financing:

Text Download spreadsheet
"0% or $3000 off" could be 15.26 APR Zero_Pct.WK1
"3.9% or $1500 off" could be 9.77 APR Low_Pct.WK1