Homer3D

Well, I don’t want to go in too deep as far as ARP’s and term length cause I am sure there are many factors that can change the outcome. I am only working by the examples that were provided. Both loans have the same ARP and the same term length. But in one loan, you end up paying $1115.40 more than the other. That’s just simple math based on the information provided.

Loans like this are geared to those that focus on lowering their monthly payments and not too concerned on how much they end up paying total in the end. In this “Corvette Payment Plan”, you are paying less per month but paying more for the car at the end of the 5 year term. Personally (and this is just me), I would rather pay less for the car and could care less about the monthly payment. Others might feel difference, and that’s OK if that works for them.

I will step away from the deferred interest/neg am/going balance thing and just lay it out like this using the numbers from his example

The car is purchased for $37,000

Loan 1 (traditional) – Pay $40,884.60 after 5 years. Subtract the original balance of $37,000, you end up with $3884.60 paid towards interest and finance changes.
Loan 2 (Payment plan) – Pay $42,000 after 5 years. Subtract the original balance of $37,000, you end up with $5000 paid towards interest and finance changes.

Either way, you own the car free and clean at the 5 year mark but are you willing to pay $1115.40 more for the car in the end to save a little per month?

Of course to save the most in interest and finance charges in the long run is to just pay cash for the car, but we can’t all have that kind of money laying around.

reasonable suspicion

I want my golden ticket daddy, and I want it now!

Contributing to financial suicide.

Scott2.0

All we know is that the "Corvette Payment Plan" has a lump sum due after five years. We know nothing about the term in which the payment is calculated. Your assumption that we do is incorrect. I'd bet money that it's a 5/10 balloon. Hopefully Nate comes back to settle this.

That's false. Under this plan you do NOT own the car free and clear at the 5 year mark. Hence the balloon.

reasonable suspicion

Like I said. .... monthly driven vehicle loans are stupid.

Doc750

So I punched this up on PenFeds calculator to put some real world numbers to this. On a 2015 Corvette 2LT (MSRP 65,265) with a $50k loan, it works out to

Monthly Payment $481.74
Final Payment $26,606.74
interest rate of 2.49%

versus

1.99% (best rate I can currently get) and purchasing the vehicle.
Monthly payment $885.53 for 60 months



Lets say you sell the car in 2 years for $42k. Total payments made would be:
Payment Saver plan: $11,561.76 paid, loan balance $38438.24 = $3561.76 back to me
Conventional loan plan: $21252.72 paid, loan balance 28,747.28 = $13252.72 back to me.


I'm not sure if I'm doing this calculation correctly.

Nate@VanBortelChevy

Correct, your balance/principal does not increase. Every payment you make comes off the principal.

The benefit to the financial company is you will pay more in interest for the life of the loan vs a conventional. The Corvette Payment Plan is amortized out to 100+ months, however many monthly payments it would take to pay the loan.



I would definitely look into a plan like this VS a lease. A lease you have nothing to show for at the end and usually the buy-out is higher than what a balloon could be.

You have the right idea. I guess one could consider it a deferred payment loan, what you didn't pay off in the 5 years is due at the end.


The payment doesn't have a formula to figuring it out other than using examples to see what the balloon comes out to be. As long as the balloon is lower than what the car is projected to be worth then the bank will consider it. Some people can afford $400 per month and can apply a yearly contribution of $2000 (work bonus, IRA withdrawl, etc...) and still pay the car off in 5 years. Another person might be able to afford a full $600 payment and have a conventional 5 year loan.



To each their own. Obviously borrowing money rarely makes the most financial sense if you can afford to pay cash. I could not afford a full monthly payment for my Corvette, fortunately because of this plan I can afford a lower monthly payment and now on my 3rd Corvette some 8 years later I've been having the time of my life. Worth every penny. Best of all when I look back at what each Corvette cost me it's dollars a day.

Pay cash for a Camaro or a Mustang and you'll loose more money after a few years than buying a lightly used Corvette under the payment plan.

You're calculations are very close. In either example the difference is $8k.

Homer3D

This is my own personal opinion, but this is a terrible way to buy a car.
I would be OK with this plan is what you had to pay at the end was exactly the same as the deferred amount, but what it really turns out to be is “what you didn't pay off in the 5 years, MORE is due at the end”

I understand people are in different financial situation and there is no “one-size fits all” type of loan, but if you can’t afford the monthly payment for the car than maybe you should reconsider why you need to get the car now. To take on a loan with a lower fixed monthly payment just to be forced to overpay for the car at the end just doesn’t make sense to me.

And consider this. If a buyer doesn’t have enough money today to make a large enough down payment to keep the monthly payments low, what makes the buyer think they will have enough money saved up to pay off that large balloon payment? If that buyer was not financially stable enough to save money before buying a car and taking on a new loan, how can that buyer set aside money for that balloon payment now that they have taken on an additional $400/month debt? And what happens if in 5 years the buyer does not have the 18k available to pay off the balloon payment? I guess you are going to have to sell and hope the car is worth more than 18k (which most likely it will be).

If one wants to make sure they pay less for their car in the long run, pay cash. But of course banks don’t like this. Banks want to loan money out. That is how they make money. So if a bank can rearrange the numbers to make it look like you are saving money, odds are you’re not. In this particular case, the bank is willing to take less from the borrower monthly to make sure they get a lot more in the end.

I am not even sure if this thread is still on topic or who actually asked for details on this type of loan, but to whomever is considered getting in debt this way, please make sure you completely understand the pros and cons of this type of loan.

/opinion

Bendog

Some folks seem to have way too much of a vested interest in others' finances. To each their own and hopefully everyone is putting away enough for their retirement but outside of that if I want to waste my money on what someone else things is a waste, so be it. Most folks don't understand my fascination with timepieces but they don't have to, I like them!

That aside, good job of staying level headed and answering questions in here Nate. Not always easy to do.

Now... I don't think I can afford a new Z06 but should I buy one??? ha ha. I wish. Someday.

Nate@VanBortelChevy

I too hope someday I can move up to a C7 Z06.

zcobra1

Let's use the analogy that you keep the car for 5 years and get another
Vette at 5 years. You take the extra $404 per month and send it to a IRA
account for 3 years. Year 4 and 5 you stick it into a savings account,
at year 5 you sell the car and get 50% of MSRP, very doable with
A Vette. So say you net $ 6K.

Now take the 6K and the 2 years of savings, $ 9700, or around $16K
And go buy that new 2020 Vette, same way. Payment saver balloon
loan. Or conventional loan, whatever ....Best of both worlds.
You get the car and the retirement savings,
Enjoyment now and future security. Just a thought....
I know lot's of variables, interest rates go up, car cost goes up, etc.
I know.....but you are enjoying life now and savings towards retirement.

A wise financial person told me a long time ago that balancing the
fruits of your labors, enjoying life,
and getting/staying out of debt was the best approach.
With money as cheap as it is today, compared to historically,
wise borrowing can work for you.

Another factor is the lower car payment will make much easier
to qualify for say a home loan down the road.
$404 a month can make a substantial difference in qualifying.
This along with that IRA counts as an asset in your
balance sheet. Lastly, borrowing at under the real inflation
rate, Makes some financial sense,
those dollars you pay back, especially those last 4/5 years
are worth quite a bit less that the dollars you borrowed.

When interest rates were double digits, it is not even a point to discuss,
No debt ! At under 3%, done soundly it can usually make sense to borrow.

Scott2.0

Just because you keep saying it doesn't make it any more true. Nowhere has it been said that the balance of the loan increases. I'm not sure where you're getting that from.

zcobra1

Paying cash is easy, if you have it. Some people even say if you can't pay cash for it, a toy, and a Vette is a toy....you should not buy it.
I paid cash for a few cars, toys, keepers though.

Funny thing is I have met some people who could pay cash for their new Ferrari, multi million dollar house, some many times over,
but financed at today's low rates and invested, bought RE,
expanded their business, etc. They simply did not want to tie up cash
in a depreciating asset, like a car.

Just because someone does not put down put a large chunk
in a car or house does not mean they are on the brink of financial doom.....
As a matter of fact, in RE, getting into a cash flowing rental
with minimum cash outlay is usually the goal. Better to have
that cash as reserves and unknown expenses.
Some feel better just having the cash as backup, just in case, and pay
1.99 % on a car loan. Everybody is different.

Homer3D

Maybe you missed where these numbers are coming from. I am not making them up. It is from the numbers Nate provided in his examples. Here is the original quote.

You can see from the words Nate wrote, in the conventional 5 year loan the buyer paid a total of $40,884.60 for the car while in the "payment plan" the buyer ended up paying $42,000 for the same car.

Nate even says (agreeing with what I said) that this type of loan benefits the financial company because the buyer will end up paying more interest.

Call it like you will. Neg am loan, deferred interest, or as Nate put it
It works the same basic way. Pay less per month now, but the money you are saving per month is added to something else in which you will have to pay later + an additional amount.

Scott2.0

Where in any of that do you see that the balance of the loan increases over time?

Just because you've spent more in finance charges doesn't mean that it's a deferred interest or a neg-am. In a neg-am, your payment is actually less than that of just the interest payment, meaning not only are you not paying down any principal, but you are also tacking on a portion of the interest payment each month. Your balance goes up every month.

Since the loan does in fact go down with this product, it is in no way a neg-am. It's a balloon loan. They're not even close in end result. At the end of a neg-am loan, you end up owing the original loan amount PLUS all the deferred interest. With a balloon loan, you owe a lump sum, which is lower than the original loan because you've been paying it down (albeit on a stretched out term with little going to principal).

Homer3D

I completely agree. I too have rentals and was once in the RE field doing home loans (so I actually do have an understanding on how all these loans work). And in RE, it sometimes does make sense to get a deferred interest loan because the money I save per month I can use to purchase another home, rent that out and earn more money at a higher rate of return to cover the amount of the other loan’s deferred interest. It was sometimes called an “Investor’s Loan” because RE investors were typically the only ones that would take on those loans knowing they needed the cash reserves ready for their next investment (and not tied up in a home).

Homer3D

I am going to go ahead and step away as it seems you are over analyzing my words versus trying to understand what I am trying to portray. It was just an attempt to demonstrate that by focusing only on the monthly payment and not what you will end up spending total on the car, you will end up spending more money in the long run. But apparently I have failed.

I completely understand people are not comfortable with making large monthly payments, which is why car loans have gone from the normal 60 months to 72 months. In the 72 month plan, the monthly payment is lower but the buyer ends up paying more for the car in the long run. And that’s OK if that works for the buyers financial situation. The same goes for why a lease works for some people and not for others. Every person is different with different financial situations, and if this type of loan works for you and your goals who am I to say otherwise. My apologies if took this thread down the wrong path.

Scott2.0

Of course paying on a debt, when being charged interest, over a longer period of time will result in a larger expense than a shorter term. Is that all you've been saying this whole time? No one would try to dispute that. It's factual.

You kept saying it was a neg-am or deferred interest or that the balance increases - all of which are untrue and may confuse someone researching this loan product.

Homer3D

I hate paying interest with a passion and sometimes that passion spews out. It all comes from a good place, to help people save money in the long run. But I think my posts turned into a vain attempt to steer people into my way of thinking. For this I apologize.

Like I said, it really is a passion. I have paid cash for some of my cars and the cars that did have loans, I paid off within 6 months. I do the same with my homes. First home, the 30 year loan will have taken just around 8 years to be paid off and on my second home, it will be paid off about 3 years after that (once the funds going into the first home can be shifted into home #2).

I do everything I can to avoid giving more money to the banks than needed. So when I see a payment plan that in the end gives the bank over $1000 more in puts me in the “screw the banks” mode. But like I said in my previous post, every person is different with different financial situations and just because the way I do things is right for me doesn’t mean it is right for anyone else.

In which ever method you choose to get to your goals, I wish you luck.