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Author Topic: Into the Black - The Dig Ourselves Out of Debt Support Thread  (Read 395705 times)
wet_blanket
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« Reply #750 on: April 14, 2012, 6:15:58 PM »

That car company did not really give an interest free loan. Trust me. The interest was embedded in the cost of the car so, in essence, the interest is being paid as long as money is owed. And the car is decreasing in value rapidly, as cars do.


This I don't understand.  I appreciate that the dealer or whoever added the foregone cost of interest somewhere else - the price of the car, an admin fee, whatever.  But once the loan is in place the amount is fixed and it makes no difference when the loan is repaid.  With an interest accruing loan the opposite may be true (depending on what fees the lender may impose).

What am I missing?
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octoprof
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« Reply #751 on: April 14, 2012, 7:49:11 PM »

That car company did not really give an interest free loan. Trust me. The interest was embedded in the cost of the car so, in essence, the interest is being paid as long as money is owed. And the car is decreasing in value rapidly, as cars do.


This I don't understand.  I appreciate that the dealer or whoever added the foregone cost of interest somewhere else - the price of the car, an admin fee, whatever.  But once the loan is in place the amount is fixed and it makes no difference when the loan is repaid.  With an interest accruing loan the opposite may be true (depending on what fees the lender may impose).

What am I missing?

You are missing that the dealer or manufacturer's finance unit is not about to loan money for less than the market rate, therefore, they will not sell the car at the lowest possible price and then give 0% financing, no matter what crap the salesman says. They just don't. They are not in the business of giving away money.

Thus, the cost of the implicit interest has been accounted for (by the seller) in the principle of the loan. In other words, that principle (the price paid for the car) is going to be big enough to cover their financing costs.

No one gives away money (or cars or whatever).

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wet_blanket
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« Reply #752 on: April 14, 2012, 8:19:37 PM »

That car company did not really give an interest free loan. Trust me. The interest was embedded in the cost of the car so, in essence, the interest is being paid as long as money is owed. And the car is decreasing in value rapidly, as cars do.


This I don't understand.  I appreciate that the dealer or whoever added the foregone cost of interest somewhere else - the price of the car, an admin fee, whatever.  But once the loan is in place the amount is fixed and it makes no difference when the loan is repaid.  With an interest accruing loan the opposite may be true (depending on what fees the lender may impose).

What am I missing?

You are missing that the dealer or manufacturer's finance unit is not about to loan money for less than the market rate, therefore, they will not sell the car at the lowest possible price and then give 0% financing, no matter what crap the salesman says. They just don't. They are not in the business of giving away money.

Thus, the cost of the implicit interest has been accounted for (by the seller) in the principle of the loan. In other words, that principle (the price paid for the car) is going to be big enough to cover their financing costs.

No one gives away money (or cars or whatever).



I understand that and even mentioned that in my question.  Obviously, this is an important consideration before someone takes on a new loan.  But in the case of an existing "interest free" loan, what is the advantage to paying early in terms of total $ spent on the car?
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octoprof
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« Reply #753 on: April 14, 2012, 8:21:23 PM »

That car company did not really give an interest free loan. Trust me. The interest was embedded in the cost of the car so, in essence, the interest is being paid as long as money is owed. And the car is decreasing in value rapidly, as cars do.


This I don't understand.  I appreciate that the dealer or whoever added the foregone cost of interest somewhere else - the price of the car, an admin fee, whatever.  But once the loan is in place the amount is fixed and it makes no difference when the loan is repaid.  With an interest accruing loan the opposite may be true (depending on what fees the lender may impose).

What am I missing?

You are missing that the dealer or manufacturer's finance unit is not about to loan money for less than the market rate, therefore, they will not sell the car at the lowest possible price and then give 0% financing, no matter what crap the salesman says. They just don't. They are not in the business of giving away money.

Thus, the cost of the implicit interest has been accounted for (by the seller) in the principle of the loan. In other words, that principle (the price paid for the car) is going to be big enough to cover their financing costs.

No one gives away money (or cars or whatever).



I understand that and even mentioned that in my question.  Obviously, this is an important consideration before someone takes on a new loan.  But in the case of an existing "interest free" loan, what is the advantage to paying early in terms of total $ spent on the car?

Getting out of debt.
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wet_blanket
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« Reply #754 on: April 14, 2012, 8:22:39 PM »

That car company did not really give an interest free loan. Trust me. The interest was embedded in the cost of the car so, in essence, the interest is being paid as long as money is owed. And the car is decreasing in value rapidly, as cars do.


This I don't understand.  I appreciate that the dealer or whoever added the foregone cost of interest somewhere else - the price of the car, an admin fee, whatever.  But once the loan is in place the amount is fixed and it makes no difference when the loan is repaid.  With an interest accruing loan the opposite may be true (depending on what fees the lender may impose).

What am I missing?

You are missing that the dealer or manufacturer's finance unit is not about to loan money for less than the market rate, therefore, they will not sell the car at the lowest possible price and then give 0% financing, no matter what crap the salesman says. They just don't. They are not in the business of giving away money.

Thus, the cost of the implicit interest has been accounted for (by the seller) in the principle of the loan. In other words, that principle (the price paid for the car) is going to be big enough to cover their financing costs.

No one gives away money (or cars or whatever).



I understand that and even mentioned that in my question.  Obviously, this is an important consideration before someone takes on a new loan.  But in the case of an existing "interest free" loan, what is the advantage to paying early in terms of total $ spent on the car?

Getting out of debt.

Well, clearly.
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dalekk
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« Reply #755 on: April 14, 2012, 8:33:10 PM »

Octoprof,

I find it hard to believe that you are actually an accountant. 
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octoprof
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« Reply #756 on: April 14, 2012, 9:25:29 PM »

Octoprof,

I find it hard to believe that you are actually an accountant. 

That's ok.

I find it hard to believe you are a professor. :o)

Peace.
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ideagirl
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« Reply #757 on: April 15, 2012, 10:29:06 AM »

That car company did not really give an interest free loan. Trust me. The interest was embedded in the cost of the car so, in essence, the interest is being paid as long as money is owed. And the car is decreasing in value rapidly, as cars do.

As others have pointed out, at zero percent, the interest is NOT "being paid as long as the money is owed," since whether you pay it off tomorrow or ten years from now makes no difference: you'll pay the same amount either way. And as Dalekk pointed out, it's actually better to pay it off later because of inflation--the raw number of your debt doesn't change over time but the value of each dollar decreases, so it actually costs you less to pay it over ten years than to pay it tomorrow.

But in the case of an existing "interest free" loan, what is the advantage to paying early in terms of total $ spent on the car?

Getting out of debt.

I have two questions about your underlying assumptions:

(1) Why do you seem not to acknowledge the fact (and it is a fact, not an opinion, for anyone who can do math) that some debt is actually good? In other words, some debt will make you richer over time than avoiding debt would--and indeed, extreme efforts to avoid debt can make you dramatically poorer? The example I posted of my family friend who paid her own way through a master's degree instead of using student loans, and in doing so cheated herself out of the 1980s equivalent of $200k in salary (not to mention four years of missed retirement contributions), comes to mind.

(2) Why do you seem not to even acknowledge the basic principle that when a person is already in debt and doesn't have enough money to pay it all off immediately, like the OP, it would be foolish to pay off a 0% loan before paying off a 3% or 5% or 10% loan? I did see what you said here:

And if the car loan is less than the student loan, there's the additional mental reward for getting a whole debt paid off. For many overextended folks, this satisfaction is needed to keep them motivated. Paying off smaller loans is very often the best way to go to help a debtor get the satisfaction of very clear (not just mathy interest-based) progress. Millions of folks have progressed to debt free status using this way of thinking when focusing just on the math of interest has failed or even confused them.

Ok... So people who can't or won't do math might find it more motivating to do something that you, as an accountant, KNOW is not the best way to get out of debt--something that will actually cost them thousands and thousands more than paying off higher interest loans first would. Isn't that a last-ditch solution? One you should only give your blessing to after you've tried to explain to them that the other approach is much better and cheaper, and after you've tried to persuade them to shortcut around their own lack of motivation by setting up automatic payments so that the higher interest debt gets paid off first regardless of how motivated they feel?

It's a last-ditch solution for the overwhelmed and math impaired. It's not something you should be suggesting right off the bat as a smart move to someone who has not given you ANY indication that hu is one of those extremely overwhelmed, math-impaired, low motivation people.

And it's certainly not something you should be defending, as if it were actually a good idea, to a bunch of forumites whose questions and critiques show you that we are manifestly not the type of overwhelmed math-impaired low-motivation people for whom such last-ditch "bad advice that's at least better than their realistic alternatives" is intended.
« Last Edit: April 15, 2012, 10:30:43 AM by ideagirl » Logged
wet_blanket
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« Reply #758 on: April 15, 2012, 11:32:36 AM »

Ok... So people who can't or won't do math might find it more motivating to do something that you, as an accountant, KNOW is not the best way to get out of debt--something that will actually cost them thousands and thousands more than paying off higher interest loans first would. Isn't that a last-ditch solution? One you should only give your blessing to after you've tried to explain to them that the other approach is much better and cheaper, and after you've tried to persuade them to shortcut around their own lack of motivation by setting up automatic payments so that the higher interest debt gets paid off first regardless of how motivated they feel?

It's a last-ditch solution for the overwhelmed and math impaired. It's not something you should be suggesting right off the bat as a smart move to someone who has not given you ANY indication that hu is one of those extremely overwhelmed, math-impaired, low motivation people.

And it's certainly not something you should be defending, as if it were actually a good idea, to a bunch of forumites whose questions and critiques show you that we are manifestly not the type of overwhelmed math-impaired low-motivation people for whom such last-ditch "bad advice that's at least better than their realistic alternatives" is intended.

In Octo's defense (not that I don't think she's capable of mounting her own defense!) the current situation of debts at 0% and ?10% is unusual.  Most people (who come on here at least) have interest rates on their various debts within a percent or three of each other.  Paying off the smallest debt first, especially when it can be done in a matter of months, is not going to cost thousands of dollars, and the psychological boost - even for people who can do the math - may be worth the tens of dollars it costs.
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octoprof
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« Reply #759 on: April 15, 2012, 2:27:11 PM »

Ok... So people who can't or won't do math might find it more motivating to do something that you, as an accountant, KNOW is not the best way to get out of debt--something that will actually cost them thousands and thousands more than paying off higher interest loans first would..

Yes, exactly.

Many people who are deep in debt can't see past the next paycheck, or tomorrow. The math means nothing to them in the face of the depression of their seemingly hopeless situation. This is not necessarily a last-ditch option (though it can be); rather it is an option that is much more motivating for many folks with really high debt or who have just been stuck in the same debt position treading water and making no progress.

Following "the math is the only thing that matters method" as you demand is sensible, but for many people it is not enough for them to dig deep for the motivation to make significant behavioral change.

Sometimes, the answers are not just about the math. Often, in fact, the behavioral, human, and emotional element has to be considered to provide momentum for drastic change. Any good accountant knows that.

« Last Edit: April 15, 2012, 2:32:03 PM by octoprof » Logged

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cgfunmathguy
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« Reply #760 on: April 16, 2012, 2:21:15 PM »

Ideagirl, I've tried it both ways. Paying off the highest-interest item first (yes, I can do the math) didn't work for me. I couldn't keep motivated long enough to make it happen. Throwing an extra $50 a month at $10K at 18% interest might work for you, but it didn't for me. Instead, I found that throwing an extra $50 a month at $750 at 0% interest got me moving faster. Now that I'm hitting the one last big debt, it's satisfying to see the numbers really change every month. That won't happen with $50 a month, but it sure does with $800 a month. No, the math doesn't work, but the psychology sure does. And you know what? I'll gladly pay that $220/yr in "motivation" tax to make it all work.
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anakin
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« Reply #761 on: April 16, 2012, 4:33:37 PM »

Ideagirl, I've tried it both ways. Paying off the highest-interest item first (yes, I can do the math) didn't work for me. I couldn't keep motivated long enough to make it happen. Throwing an extra $50 a month at $10K at 18% interest might work for you, but it didn't for me. Instead, I found that throwing an extra $50 a month at $750 at 0% interest got me moving faster. Now that I'm hitting the one last big debt, it's satisfying to see the numbers really change every month. That won't happen with $50 a month, but it sure does with $800 a month. No, the math doesn't work, but the psychology sure does. And you know what? I'll gladly pay that $220/yr in "motivation" tax to make it all work.

Right. People - that's us - make economic decisions based so little on the math. Even when we can do the math (I did too, cgfunmathguy) with amortization tables, there is more than the cognitive aspect of losing weight, stopping smoking, building up an exercise plan, or budgeting the household. It's an active field of cog psych and economics (e.g. agent-based modelling). Dan Arieli has an excellent book I've extolled before titled Predictably Irrational, a really entertaining expose of all the ways we humans are irrational and the patterns we follow. For example we are absolutely terrible at estimating risk and scale - important features of household budgets - even when we know we're terrible at it.
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clean
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« Reply #762 on: April 16, 2012, 5:44:37 PM »

The idea is to focus on the smallest debt so that you get the psychological benefits of focus.  However, it is not a sin to transfer the high rate balances to lower rate cards.  No one says that you can not move the money to another card (as long as you dont think that you have 'paid it off' ... paying off one card by moving it to another accomplishes nothing toward reducing debt).

Ideally, one would move as much debt (as long as they dont charge you an up front fee) so that the highest rate card IS the one with the lowest balance.  But if we bandy the word "Ideally" about, we may find that "Ideally" we would not have entered into consumer debt in the first place.

Finally, all the math talk that has been mentioned recently fails to account for risk.  Debt increases risk.  There is a mathematical relationship for it (see Hamada's Levered Beta for one of the formulas).
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anakin
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« Reply #763 on: April 16, 2012, 8:15:46 PM »

The idea is to focus on the smallest debt so that you get the psychological benefits of focus.  However, it is not a sin to transfer the high rate balances to lower rate cards.  No one says that you can not move the money to another card (as long as you dont think that you have 'paid it off' ... paying off one card by moving it to another accomplishes nothing toward reducing debt).

Ideally, one would move as much debt (as long as they dont charge you an up front fee) so that the highest rate card IS the one with the lowest balance.  But if we bandy the word "Ideally" about, we may find that "Ideally" we would not have entered into consumer debt in the first place.

Finally, all the math talk that has been mentioned recently fails to account for risk.  Debt increases risk.  There is a mathematical relationship for it (see Hamada's Levered Beta for one of the formulas).

Uuhhh, see my post right above yours. But you're right: many roads to Rome.
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octoprof
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« Reply #764 on: April 23, 2012, 6:48:04 PM »

This is not a website I've viewed before but I thought this list of "7 signs you are heading for long term financial ruin" was worth pondering:

  • You donít have a financial plan.
  • Doh! Itís not how much you make, itís how much you save.
  • You have more credit cards than slots in your wallet or purse.
  • You donít know much about your 401K, and IRA is just an unknown acronym.
  • Repeating the same mistakes as others.
  • You invest or buy even if it sounds too good to be true.
  • You consider it an achievement to pay the minimum balance on your credit card.

More detail in the article, of course.
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