Have you ever wanted something so bad in your life? Perhaps it was a house, car, jewelry, mobile phone or appliance. And have you ever been told that it is going to take a while to fill in your order because of the long wait list? Just the thought of having to wait makes you want that item all the more.
Now what if you were told that you could jump the line if you just availed of in house financing to buy your item? You will even get ahead of all the cash buyers. Your dream just got closer to reality.
But let’s be more specific. Let’s assume that what you wanted to buy was a new model SUV costing Php1.4 million. Let’s assume further that you just need to put up a 20% down payment (Php280,000) and that all other expenses for the first year in buying the car (e.g. LTO registration for the first three years, chattel mortgage fee, and insurance) would be free. Your monthly amortization for the next 60 months will be Php27,576.59. Also assume that the dealer will throw in window tinting, floor matting and seat covers for free. By many measures, this seems to be a great deal. Would you take it?
The only way we could assess whether the deal is good or not is if we compare it with another.
Firstly, by inputting the data given in the MS Excel formula =rate(nper,pmt,pv), you will arrive at an effective interest rate of 16.57% p.a. Well guess what, prevailing bank loan rates are just at 10% p.a. If you were to avail of a regular bank loan, your monthly amortization will just be Php23,796.69, giving you a savings of Php226,793.85 over the next 60 months. Availing of in house financing will be like paying the down payment almost twice! And if you were to add the difference in total amortizations to your down payment, your monthly payments with the bank will be just Php18,977.99.
In addition, while the first year’s insurance premium will be for free (and is valued at around Php34,000), the next four years of insurance premiums will be much higher than those of a policy where you pay for the first year of insurance.
All told, the deal comes out to be much more expensive than just availing of a regular bank loan and waiting in line patiently.
You see, car dealers create this artificial shortage and play around with one of people’s basic survival instincts, which is to consume things now (or “now na”) versus in the future. This is also a cornerstone principle in economics and time value of money where money today is worth more than money in the future. We hardly think of the mathematical consequences when this basic instinct is even merely tickled.
So are you doomed to spend more? Not really. You just need to teach yourself a new and simple trick and that is to shop around. Just ask one of the savings banks of universal banks for the monthly amortization on a similar loan with them. The difference between the bank’s monthly amortization and that of in house financing, multiplied by the term of the loan should be enough to jolt you back to reality and instill the virtue of patience.
Remember that the shortage is indeed artificial.
(Originally written by Efren Ll. Cruz, RFP at http://www.savingstips.com.ph)
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