How is a car loan an example of Time Value of Money?
Under what circumstances should an individual take out a loan versus paying in
cash? How have recent zero money down and zero money interest for 12
months offers affected potential cash buyers?
Time value of
money (TVM), generally speaking, can be seen in a car loan through the focus of
interest accumulation over time. A car loan at 21% interest equals
$446.38 per month over five years. This equals $10,282.83. By paying an extra
$100 a month on this loan, the size of the loan can be cut in half over 5 years
leading to a savings of more than $5000.
A consumer should only take a loan over paying cash,
when they will save as a result of the loan. For instance, a car loan that is
$200 a month is cheaper than having to consistently put repairs into an old
car. Plus over the long-term a new car can save more money if it is taken care
of, by allowing the consumer to not have a payment and not have repairs for
longer amounts of time.
Many auto dealers advertise the claim you can buy a new car
with no money down or minimum and no payments for the first year. However these
ads are usually used to attract interested car buyers to the dealerships. These
deals are extremely hard to qualify for, most often requiring perfect credit. Most customers will not be able to receive these special car
financing deals. Usually after you have picked a car you like, they will break
the news and tell you that you are not eligible for cheap car loan rates with
zero down payment. The reasons can range from your poor credit ratings,
insufficient down payment and so on. I
think these deals have not helped car dealers simply because in a rough economy
the person who was interested in this deal was looking at it as an option that
was affordable, but once they realize they cannot get it the affordability of
the car is gone.
