I am constantly amazed at how little people know about money and how much they spend without thinking beyond “can I make the payment?” Part of the problem is that nothing in our upbringing prepares us to think about money. Cash is a rare commodity; the world lives on debit cards, credit cards and easy payment terms.
Money is actually two things. First off, it is a method of exchanging work done in one place for goods taken from a different location. A good example is a paycheck earned in a car assembly plant spent getting groceries. The second thing that money has always been is a commodity. Commodities are bought and sold. Again, a good example is groceries.
The commodity side of money is often where there is a problem. The cost to you is called interest and it is the lender’s profit in the deal. Every lender has to disclose all the relevant information in a transaction, but you need to understand the information to make the best deal. Just knowing that you can afford the payment isn’t enough; you may be paying too much or have potential problems in the future.
If the loan is a “declining balance” loan (most are), the interest you pay is calculated on the amount you owe each month. Much like a mortgage, these loans may only take a dollar or two of the capital you owe each month at first. Problems can arise if you have a traffic accident where the car is a total loss, and the value to the insurance company is less than what you owe the finance company. Not only do you have to come up with the difference to finish paying off the loan, you may have to pay a penalty for the early reimbursement of it.
When you want to trade your car in, the “trade-in value” of your car has some flexibility. One dealer may offer you an X amount of money and another may offer you X plus another $2,000. This may sound like a good deal, and it may or may not be. The price out the door, or more aptly put, “the price out of your jeans” is all that counts. If the dealer with the higher prices wants more money for the car you are after, maybe he is trying to buy you with your own money or has some extra profit built into his finance plan.
The number of variations on this theme is nearly endless, so keep these points in mind when you buy.
Money is actually two things. First off, it is a method of exchanging work done in one place for goods taken from a different location. A good example is a paycheck earned in a car assembly plant spent getting groceries. The second thing that money has always been is a commodity. Commodities are bought and sold. Again, a good example is groceries.
The commodity side of money is often where there is a problem. The cost to you is called interest and it is the lender’s profit in the deal. Every lender has to disclose all the relevant information in a transaction, but you need to understand the information to make the best deal. Just knowing that you can afford the payment isn’t enough; you may be paying too much or have potential problems in the future.
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If the loan is a “declining balance” loan (most are), the interest you pay is calculated on the amount you owe each month. Much like a mortgage, these loans may only take a dollar or two of the capital you owe each month at first. Problems can arise if you have a traffic accident where the car is a total loss, and the value to the insurance company is less than what you owe the finance company. Not only do you have to come up with the difference to finish paying off the loan, you may have to pay a penalty for the early reimbursement of it.
When you want to trade your car in, the “trade-in value” of your car has some flexibility. One dealer may offer you an X amount of money and another may offer you X plus another $2,000. This may sound like a good deal, and it may or may not be. The price out the door, or more aptly put, “the price out of your jeans” is all that counts. If the dealer with the higher prices wants more money for the car you are after, maybe he is trying to buy you with your own money or has some extra profit built into his finance plan.
The number of variations on this theme is nearly endless, so keep these points in mind when you buy.
- It is the money out of your pocket to get what you want that counts.
- If you finance, get at least two quotes on what the cost of financing would be.
- Pay your loan off as quickly as you can. Each month longer you take is less money you get to keep.
- Read all the documents before you sign and understand them thoroughly. Don’t be afraid to ask questions and don’t be afraid to walk away if you don’t get answers.