Zero Interest Car Loans?

Some real life examples of Dave Ramsey lessons.One of his myths from Total Money Makeover:  “You can get a good deal on a car at 0% interest.”

I agree that is a myth.

With permission, without using names, here is some of an email exchange with a current potential bankruptcy client.

“Some credit cards give rewards if you control yourself, like we used to, the GM card provided deep discounts on new vehicles.  The article says if you pay cash for a car credit does not matter.  But if the dealer is offering 0% financing for 5 or 6 years it DOES matter.”

This view bumps into a couple of Ramsey’s themes, thinking you can control yourself using credit, and accepting the car company marketing.

Zero percent financing is never that to begin with, as you can always get a cash discount by paying in full up front.

That amount you finance at zero really includes a premium for not paying up front, otherwise known as, interest.

A friend of mine used to be a vice president of one of the auto companies.

He described what used to be called the “equity month”, the  month in which the vehicle value first exceeded the balance due on the loan.

Now, this goes back to the 1960s, when car loans were 24, maybe, 36 months, and there was always a down payment, frequently in the form of a trade in, of a paid for used car.

That equity month would be 7 or 8 months into the contract.

Significant, because, after that, there was minimal risk to the lender for default once there was equity, they could repossess and get their money back.

Fast forward to a couple of years ago:  7, even 8 year, car loans, where the trade in was the negative equity from the last 2, or 3, maybe more, vehicles.

I had a client who owed over $70,000 on a $45,000 vehicle.

Like my new friend, she figured if they gave her the loan, she could afford it.

Think about that for a minute.

You let the side of the transaction that makes money on the loan, which costs you money, decide what you can afford.

There is the American love affair with the automobile, as expressed by my new friend:

“What I cannot afford is to go through life without.  Old beer commercial said you only go ’round once. Do it with gusto.  I do it with h.p. (horse power)

You cannot enjoy automobiles unless you have an enjoyable automobile.  To each his own . . . . . . . .

I LIVE for automobiles!”

So, does he really need that $50,000 Corvette?

A guy who does not have a job?

I know what he thinks:  “I may read more of that site, but am not impressed yet.  I LOVE CREDIT!!!  (and dislike lawyers!)

What do you think?

Do my fellow attorneys, financial counselors, anyone, have any tips on counseling clients like this?

Zero Interest Car Loans?

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