How to determine your savings for 0% APR Loans

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!

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It is a sunny day, the windows rolled down, and no one on the highway. You can’t help but step on the gas cruise a little faster, or perhaps your a few minutes late and want to make up some speed, whatever the reason many Americans find themselves speeding on the highways.

It is no surprise that speeding does consume more gas and in return increases your fuel consumption sending you to the pump more often, but how fast is to fast? What is the optimal speed? How can you go further on the same tank of gas? And, most importantly, how much does your speeding cost you?

What is the optimal speed?

I found a study called the Transportation Energy Data Book that has some very useful information regarding this topic. Unfortunately the data only goes through 2000, but nonetheless it still gives a good picture as to what an estimated optimal speed should be.

First of all, the optimal speed should be defined as the speed at which the least amount of fuel is used to achieve the greatest MPG. Since the engine burns some gas no matter what speed you drive, low speeds will not give you a good MPG. On the flip side, as you increase speed the momentum works to improve efficiency up to a certain point. At that point, the resistance and drag of the car start to work against you and require more and more fuel for just to maintain your speed.

In the study, they sampled 9-cars from 1997 and found that the optimal efficiency occurred at 55 MPH. This increased from an optimal speed of 40 Mph for cars between 1973-1984 (a 37% improvement from car design). It is probably safe to say that the optimal speed in today’s new car designs have inched up a bit. With that assumption the optimal speed of today’s cars probably lies somewhere between 55-65Mph.

So how much does my speeding cost?

In the cars tested, roughly you lose 3% in the first increase of 5mph, and then 7% for every 5 MPH thereafter.

55 = 0%
60 = -3%
65 = -7%
70 = -7%
75 = -7%

The difference between 55 MPH and 75 MPH is -24%. So, if your car gets 30 MPG, your MPG will be reduced to 22.8 MPG driving at 75 Vs. 55. Based on the current gas in my area ($4.79), if I drive 100 miles in a car that gets 30MPG here are the comparisons:

So you save 30-minutes in driving time for $5.03 in fuel cost.

One thing to keep in mind, these numbers are based on an average of several types of cars. Depending on your car, you may have to slide the scale left or right. A very aerodynamic car might have an optimal speed of 65 MPH, whereas your H2 Hummer might be 50 MPH. Unfortunately, I could not find any data on specific car models to send you to, but use common sense based on the size and shape of the car.

How can you make your tank go further?

Even if you still do speed, you can make a large difference in your overall MPG by knowing a few facts.

The more you stop the more fuel you burn. Obviously, when you are idling you are getting 0 MPG, but the larger problem comes when you start again. The initial fuel required to move your car is much higher than the fuel required to keep your car moving. Avoid frequent stops if you can.

Similarly, acceleration to quick de-acceleration reduces your MPG. When you are inconsistent with your speeds, your car becomes less efficient since efficiency is achieved when you hold a speed long enough to offset the acceleration.

Some tips:

-Accelerate slower in the city and try to maintain a consistent speed between signals. Speeding to the next light will cause your MPG to decrease.
-On the freeway, try to maintain a consistent speed.
-Avoid roads with lots of stops if possible.
-Don’t prove how fast your car can go from 0-60.
-Remove any objects on your roof.

With any luck, you can achieve 3-15% improvement in your MPG without slowing down.

The 600+ bill is aimed at helping distressed homeowners. I am sure we all don’t have time to read the full document (housing act), so here is a great summary of what the bill is going to do provided by Votesmart.Org:

-Establishes the Refinance Program Oversight Board, which is responsible for coordinating a program that insures “homeownership retention mortgages,” which are refinance loans designed for borrowers who are at risk of foreclosure (Sec. 112).

-Specifies that the aggregate original principal mortgages insured under the “homeownership retention mortgage” program may not exceed $300 billion (Sec. 112).

-Expands eligibility for FHA mortgage insurance to include borrowers who have been deemed “high risk” due to having a credit score equivalent to a Fair Isaac Corporation (FICO) score of less than 560 (Sec. 206).

-Provides incentives for “high risk” borrowers who have consistently paid their premiums on time that would reduce the amount of annual premium payments to payment levels equal to that of individuals who are not deemed “high risk” borrowers (Sec. 208).

-Mandates the establishment of underwriting standards which allow the FHA to insure mortgage loans for qualified borrowers who have existing mortgages with adverse terms or rates, qualified borrowers who do not have access to mortgages “at reasonable rates and terms for such refinancings due to adverse market conditions”, and qualified borrowers who are in default or at imminent risk of being in default (Sec. 210).

-Outlines the following eligibility requirements for receiving insurance for a “homeownership retention mortgage”:

-The insured residence shall be the sole residence in which the mortgagor has a full ownership interest,

-The mortgagor shall be verifiably unable to pay the existing mortgage(s) and, as of March 1, 2008, the mortgagor shall have had a mortgage debt-to-income ratio of greater than 35 percent,

-The new loans shall not exceed 90 percent of the property’s value,

-Prepayment, default, and delinquency penalties on existing mortgages shall be waived,

-Indebtedness under the existing senior mortgage shall have been reduced by such percentage as the Refinance Program Oversight Board may require, and holders of liens on property securing a mortgage to be insured under the program shall agree to accept the proceeds of the insured loan as payment in full for all indebtedness under all existing mortgages,

-The Secretary of Housing and Urban Development shall hold and retain a lien on the residence which will be subordinate to the mortgage insured under the program but will be senior to all other mortgages,

-The mortgage insured under the program shall bear a single rate which will be fixed for the entire mortgage term,

-The mortgagor shall undergo a criminal history check to ensure that he or she has not been convicted of mortgage fraud in the past seven years (Sec. 112).

-Requires the implementation of the following underwriting standards for the “homeownership retention mortgage” program: the mortgagor insured under the program shall have “a reasonable expectation” of repaying the mortgage, there shall be no denial of insurance based on credit scores, based on previous delinquency or default, or based on bankruptcy, and a total debt-to-income ratio of up to 50 percent shall be allowed (Sec. 112).

-Terminates “homeownership retention mortgages” two years after the enactment of this amendment, in the absence of any approved extensions (Sec. 112).

-Increases the allowed levels of principal obligations for mortgages insured by the FHA (Sec. 203).

-Extends the term of mortgages insured by the FHA from thirty-five to forty years (Sec. 204).

-Establishes the Federal Housing Finance Agency, which shall supervise and regulate Fannie Mae, Freddie Mac, and Federal Home Loan Banks (Sec. 311).

-Raises limits on loans that Fannie Mae and Freddie Mac can purchase from $93,750 to $417,000 for a single-family residence, from $120,000 to $533,850 for a two-family residence, from $145,000 to $645,300 for a three-family residence, and from $180,000 to $801,950 for a four-family residence (Sec. 333).

As it stands today, the bill as passed the Senate 84-12.
Bill Sponsor: Nancy Pelosi 

Key attention should be noted that this bill will reduce loan balances for troubled homeowners and transition the debt carried by the banks to the Federal Government (taxpayers).

One should also pay attention that this bill has roots to the banking industry. While the stated goal is to help troubled homeowners, it is a bank bailout. You can read an internal document from Bank of America posted by the bigpicture and help but not see how similar the bill is to the ideal plan outlined by BofA.

My favorite quote in the document “we believe that any intervention by the federal government will be acceptable only if it is not perceived as a bail-out of the bond market”

Do you have the next great magazine idea but no one to fund your idea? Do you have great writing skills, but no magazine to publish your work? No worries, now you can start your own. MagCloud is a new company that helps you publish your own magazine. They print, mail, and collect the fees for your subscriptions, all you have to do is set a profit you wish to collect and upload a hi-rez pdf. of the magazine you create. Market your magazine and you are off to making money. There are no upfront fees, however, you do have to be invited to be a publisher in the beta release but you can become a member and purchase magazines that people have created.

Another great way to make some extra cash if you have the skills to layout a magazine.

 (photo from Chevrolet.com)

So you want to buy an SUV.  Now is not the time.  I pulled some data from KBB.Com and Edmunds.com to show just how crazy the numbers are.  The chart below shows three cars, a Jeep Cherokee, Chevy Tahoe, and Honda Accord (for the non-suv comparison).  For each car you can see the 2008 MSRP, then three years of blue book value with a very low 12K miles a year put on the vehicles.  The Value lost is how much the car has decreased in value after the end of each year in that year.  The final column, is what your monthly loss is per month based on one, two, or three years of keeping the car.

 

It is shocking to see that a Jeep Cherokee will lose 40% of its value in the first year with a small amount of miles.  The Tahoe, a very popular SUV, will lose 44% in two years. 

I believe what we are seeing is an over reaction to high gas prices.  I value the data from KBB, but it can not always account for irrational behavior and as such you should avoid buying any new SUV unless you are the type that does not care about losing 10K or 20K.  If you need the space, buy a wagon or other vehicle that is perceived to get better gas mileage as it will hold it value better.  If you have to get that SUV, then buy used from a private party if anyone is stupid enough to sell at the super low prices.  Retail rates on any of these cars at the dealers will be inflated by at least 2-4K above private party, so don’t think buying a used SUV at the dealer is a good idea either.

Basically, until the market settles, don’t even consider buying a new SUV.  If you are selling one, keep in mind the very low KBB values and take the time to do the math.  Is the extra loss in the value of your car a fair exchange for the more fuel efficient car now?  It is simple math, don’t get caught in the hype as you will be burned.