What A Deal

One favorite marketing tool today is zero percent interest for an extended period of time.  Taking a brief look at what really is happening, one needs to remember, “there is no such thing as a free lunch.”  The cost of whatever you buy goes up.  You don’t really think they are going to tie up their money for five or six years without a profit do you?  And, the sad part is that those that do not finance, have to pay the same higher price, but that’s even better for the seller.

Because I like cars, let’s examine what happens if you finance $30,000 at zero percent for 72 months.  In round numbers, the monthly payments are about $420.00.  At the end of the first year, there will be a balance of $25,000.  By the end of the second year, the balance due becomes $20,000.  In all probability, the car is not worth $20,000 at the end of the second year, depending on condition, etc.  It gets worse by the end of the third year.  You still owe half the loan and again the car is worth less than what you owe.

Let’s review.  You paid a higher price for a vehicle that you probably won’t want by the end of the third year, and you have no trade value.  You are now what’s called, “upside down.”  If you trade for another vehicle, the difference in what you owe and what the car value is will be added to your new amount to finance.

The really bad news is that if you bought a house full of furniture on the same “zero percent” plan, the furnishings have no value and you still owe.

While I don’t know what automobile manufacturers consider a good return on a car sale, I would expect that they are looking for at least a 10% return on their money, not counting the up front extra cost for making you such a good deal.

Marketing gurus love this plan because it works so well.

Keep trading cars and by the time you are too old to drive, you will only owe a fortune.

But, you’re too old to drive anyway.

PMO
©2016