When buying a car, the most frequently asked question is “How much down?” Is your answer 50%, 20% or zero? The more appropriate answer might be “How much?” or “How much discount if I pay cash?”
The amount we pay on things you buy is fairly obvious, but what you may not realize is the cost of financing, or the penalties you pay if you are late on payments, or those pesky monthly fees. These “extra” expenses will cost you money out of pocket, and worse, they DO NOT HELP you pay down your principle.
Interest, depreciation, penalties, and extra fees are
MONEY DOWN THE DRAIN!!!
Example 1: If you buy a $30,000 new vehicle (including TT&L) with 10% down, and you finance it for 72 months at 9% APR rate, your monthly payment is $486.69, and the total interest is $8,042. The total amount out of pocket is a whopping $38,042 for a car that had original price of about $28,000. More than $10,000 was a wasted cost down the drain.
In addition, if the owner decides to sell the car after 4 years, he will receive about $11,200 (40% of $28,000) and loses about $16,800.
Example 2: Having credit card and carrying monthly balance is another money sink. Let’s say that you have a credit card that charges 18% a year. You charge $200 each month, but pay down $100 at the end of the month. After 6 years, you have charged up $14,400, and paid down $7,100, so your balance will be $13,096. Total interest paid so far is $5,796 in 6 years. This is not a small sum.
Even if you stop charging ($0) now and increasing payment to $200 each month, it will take another 22.5 years to pay off the credit card.
Example 3: Using example 2, but you had to pay $40 each month for over the credit limit fee when balance goes above $12,000, then you will NEVER be able to pay off the balance.
Use debit card instead of credit card. You will NEVER pay a finance charge.
Example 4: Mortgage of $250,000 at 5% for 30 years will cost $233,141 in interest over term of the loan, but the mortgage of $250,000 at 4.75% for 15 years will cost $100,024 in interest, saving you over $133K and 15 years. That's alot of French fries. But I did not take PMI and other costs into consideration.
100% down plan for a house is good, but not realistic for most. Pay down at least 20% and go for 15 year fixed mortgage and avoid the PMI which does no good for the consumer.
If you are smart savvy, then save up to pay for things, or save a big down payment for a mortgage, and pay off the loan as quickly as possible (most debt free people) have paid off mortgage in 7 years or less.
I reiterate: Interest, depreciation, penalties, and extra fees are MONEY DOWN THE DRAIN!!!
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Comments: 9
Simply put, people get themselves in a bind paying the minimum on cards/loans and changing vehicles every 3-4 years instead of keeping them as long they'll last. My wife drove her Buick Roadmaster for over 15 years and I still have my Jeep Cherokee after 10 years.
Bottom line, the poor folks are the ones who do this the most. If you look at parking lot at some project vs. burbs, you won't find a correlation in "is poor therefore drives a car worth less than 8,000." The more poor they are the more credit card debts and so forth.
I don't know about a major increase in said bankruptcies. People seem to have at least partially woken up to the dangers of credit. Maybe not the majority but far more than a year or two ago.
Even if you did qualify for deduction, the total mortgage and property tax expenses must exceed $11,400 by a significant margin (every married couple can get a minimum of $11,400 deduction whether you want it or not. So only the amount exceeding $11,400 is significant.
Example: A married couple has a mortgage balance of $250,000 at 5%, and property tax of $6,400. So the mortgage interest this year is about $10,000 and the combined deduction would be $16,400. This is $5,000 over the standard deduction. So they receive about $1,250 in tax refund. So in effect, they paid $10,000 interest to receive $1,250 in tax refund. You tell me if this is a good deal.