Why 0% financing is not free!

Below is guest post from Ronny Miller, President of Gallup FCU

If you are like millions of other consumers you have been lured into the dealership with the promise of “Free Money”. Ok folks, it’s time for a reality check. Have you ever heard the expression, “If it sounds too good to be true, then it is.” Please repeat after me…..There is no such thing as FREE MONEY!

Qualification

The first big hurdle to overcome is actually qualifying for the best rate available. Less than 10% of those that apply for dealer financing actually qualify for the best rate available. The 90% that don’t qualify end up with some type of standard interest rate. Regrettably, they don’t walk away from the deal because at this point in the transaction they are too emotionally attached.

Dealer Financing versus Dealer Rebate

Here’s the standard example. Let’s say you qualify for 0% or instead you could take the $2000 rebate on a purchase price of $25,000 over 5 years. If you take the rebate you would have to finance $23,000 at an interest rate of 4.99% (This is the current interest rate for a new auto at Gallup FCU)

Purchase Price $25,000 vs. $23,000

Payment $417/month vs. $434/month

Total Cost over 5 years $25,000 vs $2,6043

At this point it seems simple right? $417 is less than $434 and you will end up paying $1043 more in interest, so this is certainly a no-brainer decision. WRONG! What you have to consider is effect of prepayment. The average auto loan last 36 months regardless of the original term. Why? Lots of reasons. We trade cars infrequency, auto accidents, and simply paying off debt at a faster pace than is required by the terms of the loan. When this happens the actual cost of borrowing is reduced.

Purchase Price $25000  or  $23000

Total Cost over 3 years $25000 or $24818

Now my guess is you are saying to yourself, yeah, but I’m not going to pay this off in 3 years. Fair enough. You have opened the door to my third and most important point, which is The Negotiation.

The Negotiation

Have you ever purchased a piece of furniture because they had an advertisement for, “12 months, No Interest”? 0% financing is very similar. If that loveseat costs $800 over 12 months with no interest, then I promise you they will take even less in cash today. So what does that mean? I’m sure you have figured it out. They are adding the interest cost right on top of the cost of the loveseat. Essentially, you are paying the interest upfront. Who wants to do that? Cash is a powerful negotiating tool so use it your advantage. Here’s my strategy for car negotiating: In the beginning don’t even mention the idea of paying cash. Let them assume you will be accepting their promotional rate or their rebate. After you’ve done your absolute best to get the price as low as possible then ask them how much they would come down if you just wrote a check for it. My guess, is you will be able to save at least $500 over and above my examples above and possibly more.

The Advice You Would Give Your Mom

There has been a lot of buzz around the financial reform laws that have been passed in the wake of the Great Recession. As a consumer, one of the biggest take away pieces to this reform is the focus on fiduciary responsibility. So what is a fiduciary and why should you care?

A fiduciary is way more than just a big word

Let’s start with some definitions, Fiduciary: “A person to whom property or power is entrusted for the benefit of another” or “A person legally appointed and authorized to hold assets in trust for another person.”

Ultimately, a fiduciary is a person who is required to act on behalf of another person as if they were acting for themselves. WHOA – that’s some serious responsibility!

Some of you might be saying to yourself, “Andrew, don’t all the professional service providers I work with have to abide by this fiduciary standard?” The unfortunate answer is NO! In fact, being a fiduciary is such a huge responsibility  that many professionals try to go out of their way to avoid this type of liability. You see, if a professional is held to the fiduciary standard and he or she violates that responsibility by doing something that is not in your best interest, they could be held legally liable.

So is your traditional stock broker a fiduciary? No, he is a salesman. Traditionally a stock broker is not responsible for bad advice and for selling products that are not suitable for their clients. On the other hand, your investment advisor who is registered with the state or SEC as an investment advisor representative is a fiduciary!

So why should you care? Well working with someone who is your fiduciary gives you an extra level of peace of mind. You can expect that this person will be giving you the same advice that they would give to their mom. If they don’t give you the advice that is most suitable for you – you have legal recourse to be able to recover any losses you sustain from implementing their recommendations.

As a consumer you should make a point of asking your professional service providers if they have a fiduciary responsibility for the recommendations they make to you. If they answer no, you need to make a serious decision about whether or not you want to continue a relationship with them.

Pod Cast #3 - Let’s Talk About Spending Plans

The financial tech podcast is back and this week Jim Collison and Andrew Hunt walk thru the basics of a spending plan.  Oh, so you are talking about a budget?  Nope, listen and hear how a spending plan is different and why you need to have one!

So is it possible to create a Spending Plan that Works?

When you sit down to budget spend every single dollar “on paper.”  Includes – Spending, Saving and Sharing.  A Zero balanced budget leaves no room for slush money, you are way less likely to fudge when every dollar is accounted for.  Remember its your money!  If it takes $1000 per month to feed your family, so be it!  Remember you can’t spend more than you have – this isn’t the federal government.  Averages are not usually a good thing but people want to know where they stack up:

· Charitable giving: 10-15% of Income

· Saving: 5-10% of Income

· Housing: 25-35%

· Utilities: 5-10%

· Food: 5-15%

· Transport: 10-15%

· Clothing: 2-7%

· Medical: 5-10%

· Personal: 5-10%

· Recreation: 5-10%

· Debts: 5-10%

Give us some feedback! What did you like? What other topics do you want us to talk about? Do you have a specific question you would like us to address on air?