Three Phrases That Need Caution!

1. “I paid off my 30-year mortgage in 5-years”

The add I heard the other day had claimed this. Let me state that if you can pay your house off in five years, you are either buying a very low cost house or make enough money to not worry about services that would be offered by a company like this.

At the end of the day, you have to pay off the principal (purchase price) no matter what path you take. Just to give yourself a baseline, take what you owe and dived it by five. That is the minimum yearly dollar amount you would have to pay not including interest.

On $100K, you have to pay $1,666 per month before any interest. It is that plain and simple, there is no magic way to improve that number. That number in itself is also a lie because no one is going to lend you $100K for free. Know your facts, call these companies if you must, but check your facts and don’t believe any claims that just don’t make sense.

2. “make $50K per month from home using our system”

Wow, what a claim. I am sure someone somewhere does make this, but it is not going to be you. If these companies truly can teach you to make this money, there would be many more legitimate resources reporting on them and not just YouTube videos and mile long websites with 100’s of claims followed by a sign-up now button at the bottom.

Do you ever wonder why these sites always have the same format? Doesn’t make you wonder a bit? You may make something from the systems, but most of the time you will probably just be out your initial investment.

The last thing you should consider, if the system truly is that easy, do you think someone is going to share that information with you? Easy money of that amount is not shared by people, plain and simple.

3. “We pay off your trade now matter what you owe”

Sure, the balance is just wrapped up to your new loan. This may be fine with you, but you still need to do all your homework to make sure the overall deal you are getting is good.

If you go into the dealer with a car that is upside down, you are in the weak position. They know you can’t sell the car, they know you want the new car, and they know you are willing to add to the price of the new car to get it. Consider this like going to battle with a BB-gun Vs. a Machine gun. Chances are your not going to win. They will throw at you discounts, rebates, attractive monthly payments, discounts on the new car, and other tactics to make it sound like the benefits you are getting are paying for the lost value in your trade. Thing is, you can get all of those things with out your trade.

The big question you have to ask, is the new car worth the lose you are taking on the old car? Why not sell it private party? Why not drive it for an additional year while saving extra for the new car?

I recently was helping someone trade in a certain SUV. The dealer offered them $6K below the actual value of the car and $4K less than the street value (this was on a car worth $8K). My advice was give them the finger, drive the car for another year and sell it private party. The money they save in gas does not pay for the $4K hit they would have taken on the car. Be cautious with your trade ins.

Subscribe to this blog's RSS feed

If you have read through this site, you know that I offer many ways to help you figure out if you are getting a good deal on your lease. I also stress the importance of not leasing a car if you are at all unsure of any factors that determine how a lease is done. It is to easy to not know what you are getting and when you are purchasing something such as a Yukon Denali, you are spending $50K. You should know what you are doing, but many people do not.

I decided to sample Yukon Denali leases since most of them come fully loaded and it lessons the chance for expensive upgrades. Using Edmunds.com, I determined that the cost for a fully loaded Yukon Denali with an extra 5K in add-ons (sunroof, larger wheels, DVD, Navigation, etc) should cost about $50,000 not including any rebates. Through some research I was able to collect details from offers and prior purchases of leases.

I sampled 10 Yukon leases and here is what I found:

You can see the payments, terms, and residual payoffs vary greatly. Next I totaled the payments over the term and added the residual to determine the final cost (It does not show any down payment the buyer put towards the car so assume the total price below is lower than the actual total price). I then put in the cost over the same term for a 5% loan based on a fully loaded Yukon with $5K in upgrades costing $50K and compared the two.

You can see the difference. Car 10 ended up over $8,000 higher than the $50K car I put together. In fact, out of the 10 cars I sampled, only 3 came in better, and two of them we would have to assume they had full upgrades and did not put more than $356.00 dollars down. Also notice how bad most of the 39-month leases worked out.

If any of the 7 other cars had put money down, the terms become worse. To make matters worse, the blue book on a 2007 Yukon Denali is $37,000. Wow, look at car 1 and car 10, at the end of the lease term you have to pay nearly what the car is worth today after making 27 payments of over $700 per month. Sound like a good deal? I guess if your spending $50,000 on a car what is an extra 6-10K right? At least you had a nice sales person and your car payment met your budget.

I hope this puts a little more light into how much a lease can cost you if you don’t know all the terms. I would like to say that someone spending $50K knows the terms, but as demonstrated here, that is not the case.

Leasing any car, expensive or not, you can get ripped off. There is a reason all the ads push leases, either do your homework or don’t lease. Remember never buy a car based on a car payment.

If anything know this.
-A lease is simply financing the depreciation of the car. American cars lease bad as they do not hold their value. Cars like Toyota, Honda, and Nissan lease better.
-The more a car holds it value, the better your lease payment.
-Down payments for leases should be very small since any amount is usually applied to the residual (a dirty trick), which if you turn your car in the money is pocketed by the lease company.
-Always know the total cost if you were to buy the car at the end of the lease. Dealers will say this does not compare to a purchase, that is a lie. It does and it should be close to what you would buy the car on a conventional loan under market interest rates.
-You will be upside down on 90% of leases.

You know those front door deals, packaged in nice borders, a payment you can afford, and colors that appeal to your eyes.

You find yourself running for the door, a BMW for $250 a month, a Mercedes for $275 a month, or any other deal that seems to good to be true.

So what is the catch? This is not hard, it is always a large down payment. $8,000 drive off, $5,500 to start, etc….

Folks, a $35K car is a $35K car, just like a $500K house is a $500K house. No matter what creative financing is applied, at the end of the day the value of the item you are buying is still the same. If you can not afford a $500K house, no matter what financing you apply for, some day you will be responsible for the balance through either higher payments, lump sums, or some other mean. Same with a car, you are paying $250 a month for an expensive car, but you have contributed a tremendous amount of cash.

So, lets say you do see one of these BMW’s for $250 per month with $8,000 down. Why would you do it? You are giving up lots of capital to apply to an asset that will lose 30-50% of its value over 2-3 years. If you are attracted to the low payment, don’t be, you have capital to help subsidize your payments if you can afford the low payment/high down payment combo. Off course this takes discipline, but at the end of the day the money stays in your pocket longer. Yes, eventually it will go away to buy your car, but until then you can do much better things with the cash.

For example, if you can afford $250 per month with lots of money down, why not do $350 per month and subsidize $100 per month? That is $1,200 per year. Lets say that you have enough cash for a four year term, that is $4,800, even in a simple Orange savings account you will earn an extra $200-400 in interest on that cash.

I am always amazed at the ads some companies run, but at the end of the day it is the monthly expense that responds well to people or they would not run these deals. Before you take one of these deals, just ask yourself if that is a smart thing to do with your hard earned cash.

And a reminder, for a lease, I firmly believe you will only get the best deal with the least amount of cash down. If you put a lot of cash down,be prepared to kiss it goodbye. It is to easy for auto dealers to make the down payments virtually disappear. If you don’t put the money down, there are less factors for you to worry about.

With all the Low APR deals, I thought it might be time to review how much does 0% APR save you and is it worth worse gas mileage.

Lets take a look at Ford’s offer of 0% APR for 72 months on 2008 F150’s. To determine what this means in savings all you have to do is determine how much interest you would have paid over a similar term under normal circumstances. For a 72 month loan, your normal APR would be somewhere between 6-8% for average credit, lets call it 7%.

To determine the total interest, you can use excel and calculate your own formulas, or simply visit this handy tool from Bankrate and enter your information and then view the Amortization schedule. Scroll to the very bottom and in the last month you will see the total interest paid.

So try this, assume 7% for 72-months on $25,000 (as that seems to be the mid-level price after discounts on the F-150).

With the 0% APR, your interest expense is $0.
With 7% APR your interest expense is $5,688.21.

There you have it, the 0% financing saves you $5,688.21 Vs. a loan for the same period at 7% interest. However, since most people do not get a 72-month loan, it is more accurate to compare the offer against the normal loan you would get. If, for instance, you normally buy cars on 48-month loans, than just use the lower number for your comparison. The savings goes down for ever year you decrease the time you would have normally bought the car. You should also adjust the interest to what you think you could qualify for.

Other compares you can do!

0% APR can be great offers, but remember, if you are looking to save money due to gas then make sure to compare the total cost of the car over the time you plan to own it including fuel costs. Many of the really good offers are on trucks or less fuel efficient cars. On the surface, they may look like the better route, but with fuel cost so high you will quickly lose those savings.

In the example above, the Ford F-150 would cost $4,421.53 in fuel base on $4.79 per gallon gas and 12K miles per year. A more fuel efficient car could save you 50% or more on that cost. Over a six year time, a car that cost 50% less fuel will save you $13K. This may be enough to justify a more expensive hybrid truck or a hybrid SUV if you need the large car. If you don’t need the large car, then you better be saving at least $13K off your deal before you take the truck over a more fuel efficient car. Keep in mind this savings assumes fuel will remain constant and that you only drive 12K miles per year. Adjust anyone of those numbers and you will get different results.

Point is, before you rush to buy a car based on the desperate measures automakers are taking, do the math to see if makes sense on the model you are looking at. If savings is your goal, you have to factor in fuel costs before you can make a good choice.

Steps to compare total cost:

1. Start with the price you will pay for the car after rebates and incentives.
2. Determine the interest expense on the loan you will be going for using the tool above from bankrate.
3. Determine the number of miles you drive per year and divide that by the average MPG of the car. Multiply the number by the gas cost in your area. Now you have the yearly fuel cost.
4. Multiply the yearly fuel cost in step 3 by the number of years you plan to keep the car. (must be the same for each car you are comparing).
5. Add the results from 1, 2, 4 to arrive to your estimated total cost of the car (this excludes maintenance, registrations, and other factors assumed to be the same for all cars in your comparison. If you are comparing a BMW to a Civic, you will have to adjust these numbers as a BMW has more expensive ownership costs).

That is it, this will give you an idea of what car is less expensive when you factor in fuel, rebates, and special financing.

Good Luck!

Interesting numbers from a CNN report for the top auto manufactures:

GM sales down 18.2% (-16% SUVS, -21% cars)
Toyota sales down 21.4%
Ford sales down 28% (SUVS off more than 50%)
Chrysler sales down 36%
Nissan sales down 18%
Honda sales up 1%

It is interesting to see these results as each manufacture had different circumstances.

Toyota, with the Prius, feel short in sales because they could not meet demand for their fuel efficient cars.
Ford, wanted to capture the SUV market and as a result they are paying the price with no real good non-suv cars in their lineup to compete with others.
GM, similar to Ford, however, their crossovers are desirable but GM underestimated demand.
Chrysler, they just don’t have any competitive cars in their lineup.
Honda, the one auto manufacture that has it right.

Even with these differences, one thing does seem in common, they all did not want to change production to more fuel efficient cars. For many years now, it would seem everything was pointing to higher oil prices and greater demand for fuel efficiency except for one thing. You-the consumer. You can claim conspiracy theories all day long, but what truly drives these companies is demand and the dollar you spend.

Think about, if you are Ford, why would you experiment with a hybrid when you have a very large share of the SUV market? You know for every factory, every employee, and every marketing dollar you spend you will sell x-number of cars (pending any unforeseen event). If you devote more resources to Hybrids, you in effect reduce your earnings. The market will penalize the company in the short term (long term may work out, but that is a hard sacrifice at times). It does not mean they can’t experiment or have small production runs, it just means they will not shift major resources to develop an unknown product. This happens everyday in many corporations, development moves forward but will always be second to what is tried and true.

Now, oil has hit unseen levels and consumers are, in mass, changing their buying habits. No longer is the SUV the car of choice and as a result you will see a very quick technology improvement in fuel efficiency from all auto manufactures as well as factories lowering SUV production in exchange for non-suv cars.

For all the executives in Toyota, GM, Ford, Chrysler, and Nissan that pushed for larger production in fuel efficient lines but were denied resources or funding, they can finally all say I told you so.

But let this also be a lesson to consumers. You direct how the companies proceed! If Americans wanted a car that gets 100MPG 10-years ago and everyone pushed, we would have them. However, when everyone says “oh that would be nice to have a car that gets 100MPG” as they buy their escalade or hummer, change will not occur or at least at a rapid pace.