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Discussion about "balloon payments".

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Old 02-23-2017, 11:14 AM   #21
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Predatory lending, should be illegal. You are luring people into cars they can't afford by showing them monthly payments in their budget. People are procrastinators by nature, so that big 10k+ payment due 5 years from now seems like no big deal until its right around the corner and you're not even close to having the money so have to turn in the car you grew to love.

I have worked in sales for both electronics and cars...do NOT do balloon payments or introductory period loans. They are structured to reduce as much risk as possible to the bank, since it is a way for them to lend more money to you then their system would otherwise allow.

Personal story, not a balloon loan but an introductory period one: My very first financed vehicle ever was when I was an 18yo who though I knew everything. I already had one CC in my own name, and my parents had me as an authorized card holder on one of theirs so I graduated HS with a healthy ~700 score for an 18yo. I sold my 636 and ran to the Kawi dealer and basically just said "Get me 150/mo or lower payments and I'll walk out with a bike". I don't even remember reading all the paperwork - just saw the bright shiny 0 miles ZX6R Ninja and the $130/mo on the paper so signed in a heartbeat. They ended up giving me a structured 4yr loan where the first 2 years were like 3% and my payments were only around $130 a month. I got used to those tiny payments, time flew by, stupidly added more debt on things like car and PC parts, then all of a sudden promotional period expired and my tiny 130/mo payments almost doubled to $250/mo. I quickly realized my mistake, made extra principal payments until tax time(which was hard as a college student working part time) when I used my refund to pay the bike off 1-1/2 years early.To add salt to the wound, I realized they had added the whole terms worth of interest to my loan right on top, so even though I paid it off in 2 1/2 years they still got the full 4yrs of interest. Learned my lesson, paid it off, and never made that mistake again.

Now, imagine that scenario but instead of payments increasing, they send you a massive ******* bill at the end of a loan after getting used to small payments for month. That is how people get repo's, foreclosures, and **** up their credit.

Pro tip: If you can't afford the monthly payments on a standard loan, it is too expensive of a vehicle for you. Either A: Save a bigger down payment to lower amount financed, or B: Choose a less expensive vehicle.

Not trying to sound harsh, but take the majority's advice and do your research. I'm not saying it can't work for certain people, but for most it is NOT recommended.
Nail on the head.
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Old 02-23-2017, 12:04 PM   #22
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This is NOT for most people as I said this is a cash flow play. It is better than a lease if you want to purchase the car at the end and not pay the tax twice. no wear and tear clause.

I disagree with the PRO TIP however. The REAL PRO TIP is pay CASH up front. If you can't afford to do that, the rest is a decision based on the time value of money.

Staying with the example of a C7 I picked above for fun, let's say you had the 59,000 in cash. Also, say you don't want to part with 59,000 in cash on a new C7 (you keep that 59k invested in a safe bond fund that earns a steady 5.5-6% since 1978) and instead choose to spend 1,040/mo on a car payment, then in my opinion it is better to do a payment saver loan and pay 591/mo payments and invest the other 449/mo and earn 6%/yr. That is a cash flow play.

After 5 years your 59000 balance with 449 being added every month is now worth 111,064 give or take and you can then choose to sell that GS for more then 29k (show me a 2012 5 year old GS selling for less) or pay it off and keep it and still have 82,000 in the bank.

That is the power of time value of money and compound interest and why this solution, when used correctly can be used to your advantage.

This is not a predatory scheme, this is simply choosing who carries the equity, you or the bank and when you want to realize it. It only works when you can out earn the loan rate which in this case is 2.49%.
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Old 02-23-2017, 12:17 PM   #23
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^^^^^uuuummmm, couple of flaws there.

1 - 6% would put you at 79K after five years.

2 - Show me a bond that guarantees 6%. If it existed everyone would know about it.
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Old 02-23-2017, 01:34 PM   #24
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6% on top of making a 449 monthly addition to it = 111. you have to add 449 in payments to get to the 111k.


Sigh....since inception 8.48%, last 10 years 6.31, the market was 6.85%.



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Old 02-23-2017, 02:51 PM   #25
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Which fund is this?
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Old 02-23-2017, 06:39 PM   #26
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Originally Posted by merim123 View Post
I disagree with the PRO TIP however. The REAL PRO TIP is pay CASH up front. If you can't afford to do that, the rest is a decision based on the time value of money.
Completely agree. After paying off my last car loan I vowed never to have a car payment again. That really keeps my spending habits in check when it comes to cars.

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Originally Posted by merim123 View Post
Staying with the example of a C7 I picked above for fun, let's say you had the 59,000 in cash. Also, say you don't want to part with 59,000 in cash on a new C7 (you keep that 59k invested in a safe bond fund that earns a steady 5.5-6% since 1978) and instead choose to spend 1,040/mo on a car payment, then in my opinion it is better to do a payment saver loan and pay 591/mo payments and invest the other 449/mo and earn 6%/yr. That is a cash flow play.

After 5 years your 59000 balance with 449 being added every month is now worth 111,064 give or take and you can then choose to sell that GS for more then 29k (show me a 2012 5 year old GS selling for less) or pay it off and keep it and still have 82,000 in the bank.

That is the power of time value of money and compound interest and why this solution, when used correctly can be used to your advantage.
Such a scenario COULD be used theoretically but come on how many people do this? The average American does not even have $1000 in savings.

http://www.marketwatch.com/story/mos...ngs-2015-10-06

Balloon payments on home loans are one thing, because there at least the asset is hopefully appreciating and likely could be sold to pay the loan if necessary. Not the case with cars. Most people are not sophisticated enough financially to understand it in that level of depth. All they see is that they can buy a more expensive car with a lower payment.


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Originally Posted by merim123 View Post
This is not a predatory scheme, this is simply choosing who carries the equity, you or the bank and when you want to realize it. It only works when you can out earn the loan rate which in this case is 2.49%.
The banks would not be offering this if they were not making just as much (or more) money than standard loans.
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Old 02-24-2017, 12:10 AM   #27
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Get a real loan. **** that bullshit.
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Old 02-26-2017, 08:48 AM   #28
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Which fund is this?
Magical fairy tale fund? Why do I get the feeling that this is a fund offered by his companies 401k plan and has little to zero knowledge about it?
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Old 02-26-2017, 02:11 PM   #29
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Magical fairy tale fund? Why do I get the feeling that this is a fund offered by his companies 401k plan and has little to zero knowledge about it?
There are plenty of funds that have yielded 10-20% over the last 10 years, the problem is that this means absolutely nothing in most cases about whether they will continue to return that in the future, and picking which funds will beat the broader market in the future is extremely difficult.
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Old 02-26-2017, 02:41 PM   #30
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There are plenty of funds that have yielded 10-20% over the last 10 years, the problem is that this means absolutely nothing in most cases about whether they will continue to return that in the future, and picking which funds will beat the broader market in the future is extremely difficult.
to clarify: OP post on this topic the word BOND.
Not FUND.

BOND yields have been crap lately as they are somewhat related to interest (plus a bunch of other stuff like risk etc)
FUND performance is related to type of equities held in funds. (Which could be stocks, bonds, etc)

long story short: why pay cash if your investments are producing a better return?
ecample: current vanguard sp500 index is looking to do about 10-12% per year. So I chose to take the 1.9 offered by USAA for a car loan vs taking cash out.
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Old 02-26-2017, 05:01 PM   #31
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Magical fairy tale fund? Why do I get the feeling that this is a fund offered by his companies 401k plan and has little to zero knowledge about it?
This fund available publicly to anyone. Not sure why you are going after me personally on this one. You questioned my math, i showed you how you left out a key part of the math to arrive at my answer. I have this fund and have been in it for 12 years or more, cant recall. Why would i waste my time making crap up? OP asked how these work, i gave him the answer as i seem to be the only one using this financial instrument and i showed how you can actually take advantage of it to come out ahead. There are far more financial instruments that can deliver 10-12% via dividends as well. All based on what risk you want to take on.
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Old 03-01-2017, 09:25 AM   #32
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Get a real loan. **** that bullshit.
or cashmeowsod howboutdat!
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Old 03-01-2017, 09:52 AM   #33
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This fund available publicly to anyone. Not sure why you are going after me personally on this one. You questioned my math, i showed you how you left out a key part of the math to arrive at my answer. I have this fund and have been in it for 12 years or more, cant recall. Why would i waste my time making crap up? OP asked how these work, i gave him the answer as i seem to be the only one using this financial instrument and i showed how you can actually take advantage of it to come out ahead. There are far more financial instruments that can deliver 10-12% via dividends as well. All based on what risk you want to take on.
Nothing personal. But saying that you can get X % from any fund is not realistic because there is never a guarantee. And yes, since the economy started to come back around a lot of areas saw real growth. If I hadn't been freshly out of college, married with a mortgage with a mortgage and trying to fix a house I would have invested heavily. Now that I'm getting a bit older I've really started to dabble in investing besides my 401k.

But the bottom line is - never buy something you can't afford. Like a kid I went to high school with. Still lived with his parents but had a decent job in one of the trades two years after graduating. Bought a brand new fullsize Hummer and a Ducatti. Good move.
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