Borrowing Money: Understanding How The Numbers Work

Author: David Berky

I would like to start out by telling you a true story. The names have been changed to protect the innocent, the ignorant and the dishonest.

John was interested in purchasing a new truck. John had done his homework and knew exactly what make, model and features he wanted on his new truck. He had visited several dealerships looking for the exact truck he wanted. He wanted to get it now and didn't want to wait to have one custom built.

Finally he found a dealership that had the exact truck he was looking for and he even liked the color.

Now it was time to negotiate the price and financing. John realized that he was not very good at numbers so he asked his friend Cindy to come along and help him make sure he was getting a good deal.

The salesperson looked up the pricing information on the truck and added in all the extra fees for tax, title, license, and what-ever-else-we-can-sneak-by-you. The total cost came out to about $22,000.

Cindy remained quiet while the salesperson explained the financing options that were available to John, checked John's credit and determined an interest rate for the loan. The salesperson then went to check with the manger to make sure the financing application was completed properly and to calculate the monthly payment.

The salesperson returned and announced that the payments on the 5 year loan would be about $420 a month. Cindy checked the numbers and agreed with the calculations. But John was a little shocked and disappointed.

Seeing his expression, the salesperson mentioned that the monthly payment may be more than what John would feel comfortable with and that maybe they could lower the payment by going to a 6 year loan instead.

John then looked to Cindy, who said that this would lower the monthly payment but John would end up paying more interest because of the longer time for the loan to be paid off. John wasn't too concerned about paying a little extra as long as he could afford the monthly payments (and drive his truck home today).

The salesperson asked John how much he could afford to pay each month on his truck loan. John indicated he could pay up to $375 per month. The salesperson then went to "get approval" from the manager to extend the length of the loan and to recalculate the monthly payment.

Upon returning the salesperson announced that he was able to "wrangle a good deal out of the manager" and was able to get the monthly payments down to, you guessed it, $375. John was excited. All he had to do was sign the papers and he could drive home with his new truck at a monthly payment he could afford.

But Cindy was curious. She asked to look at the numbers but this time the salesperson was a bit hesitant. The salesperson tried to change the subject one or two times, but Cindy insisted on seeing the numbers.

Cindy review the numbers and did some of her own calculations and found that the monthly payment on the truck loan should have been about $350 a month. So how did the salesperson come up with $375 per month?

After looking at the terms of the contract a bit closer, Cindy noticed that the price of the truck was now $24,500, an increase of $2,500. Cindy asked the salesperson why the price of the truck had just gone up? After trying to dodge the question and then blaming it on a mistake by the "finance department," Cindy and John walked out of the dishonest dealership.

As excited as he was to have his new truck, John was angered that the salesperson/dealership had tried to rip him off by taking advantage of his lack of understanding how the numbers in a loan relate.

John then had Cindy explain to him in basic terms how the number related and what to look for in the financing terms.

Cindy explained that there are four elements to a loan; the principal or amount you are borrowing, the interest rate, the time period and the monthly (or weekly, bi-weekly, etc.) payment.

And the numbers relate like this. If the amount goes up the payment goes up. If the interest rate goes up the payment goes up. If the time goes up the payment goes down.

So in the case of John's truck loan they extended the time so that the payment would go down. But the payment went down further than what John was willing to pay. So they decided to increase the amount so that the payment would match what John said he could pay.

But they "forgot" to explain to John that the price went up to make the payment hit his target. And they couldn't come up with a valid reason for the price increase when Cindy questioned them on it.

Without Cindy and her knowledge of how the loan numbers relate, John probably would have got his truck, but he would have needlessly over-paid $2,500.

John found a truck he liked even better at a different dealership, bought Cindy along to help make sure he was getting a good deal, and then took her out to dinner.

About the Author

David Berky is president of Simple Joe, Inc. One of Simple Joe's best selling products is Simple Joe's Money Tools - a collection of 14 personal finance and investment calculators. Visit http://www.simplejoe.com to learn more.

Need To Borrow Money? Then Borrow The Smart Way

Author: MoneyExpert

Most of us borrow money to buy our homes, and many of us borrow money in the form of a loan to pay for cars and holidays, or the odd shopping treat. If your borrowing is under control, then it is a sensible way to manage your finances.

The secret to safe borrowing is making sure your debts and the interest you pay are kept under control.

So if you are going to borrow money, what is the best way to do it? We look at the advantages and disadvantages of the most popular methods borrowing.

Unsecured personal

Unsecured personal loans from a bank, building society or other provider can be a relatively quick and easy way to buy what you want or to consolidate your debts. Generally they allow you to borrow between £500 and £25,000. But they can tie you in for between six months and 25 years.

Because these loans are unsecured - there is no collateral such as your home to back them up if you default - therefore lenders can sometimes charge more to compensate for their risk.

Lenders advertise their Annualised Percentage Rates, but beware as depending on your credit history you may not get qualify for the lowest rate. If you are believe you to be a higher risk then they will charge you a higher rate.

Personal loans tend not to have set-up fees. The downside is that if you wish to pay back the loan back early ahead of the agreed time you could be stung with early redemption fees. It is always good to pay off debts as soon as possible, so personal loans may not be right for you if you think you may have the ability paying them off quickly.

To find the best personal loan for your circumstances see our best buy tables and apply online.

Homeowner loan

A homeowner loan is similar to a personal loan, but it is secured on your home. Interest rates on homeowner loans tend to be variable, unlike unsecured personal loans, which have fixed rates.

You also might also have to pay other charges, such as an arrangement fee which may include a property valuation fee.

Again, these charges have to be added to the interest you pay when calculating the best homeowner loan for you.

The big advantages of homeowner loans over personal loans are that they usually allow you to borrow more money over longer periods of time (between three to 25 years) and usually up to the equity you have in your home. You might still get more than this, albeit at a higher interest rate.

Because you can pay the loan back over a longer period, then the monthly repayments can be more manageable, helping you control your finances better, however if you don't keep up repayments your home can be at risk. So think carefully before you commit.

The interest rate on a secured loan can be lower than for a personal loan because of the extra security. However, this is not always the case, so you do need to check what rates are available to you.

Find the best secured loan quote for your circumstances

Re-mortgage

For most of us, a house is the best security we have. If the value of your home is greater than the mortgage you owe on it - you own part of the house and have equity - then you can usually re-mortgage to raise cash. If you have a good record of meeting payments on your mortgage, then you are likely to get a quick decision.

There can be fees for re-mortgaging, and you have to take these into account when weighing up the cost. A key advantage in many cases of re-mortgaging is the flexibility to make overpayments, so you can clear the debt as soon as you can and cut your interest bill.

The interest rate can also be lower than that on offer from personal loans, but you still need to check this. To see whether your mortgage is competitive, click here to get advice on the best mortgage product for you

Overdrafts

The most flexible way to borrow for those who can repay quickly is an overdraft. But use them with caution as there can be some pretty hefty charges and interest to pay if you do go overdrawn.

Some overdraft facilities are free whist others may for charge interest on the money borrowed. But if you can repay in full in a short space of time - such as when your pay cheque goes through - then this is a quick and easy way borrow some extra money. The interest rate may be high but it's over a very short time with no redemption penalties.

How much of an overdraft you can negotiate depends on your bank, how long you've had the account and how much you pay in every month. The charges you need to look out for are annual fees for setting up overdrafts, fees for going over your limit and monthly charges.

To find the best current account check out our best buy tables.

0% introduction purchase rate credit card

If you need to buy and item and cannot pay for it immediately, then a credit card with a 0% introduction rate could be the solution. These introductory rates can be for periods up to 12 months.

This is one way of borrowing interest-free. This might be the case, for example, if you need to borrow for Christmas presents or pay for a birthday treat but don't have the immediate funds to cover the purchase. As with all debt your aim should be to pay it off in the shortest time possible,

To find the best 0% balance transfer credit card for your circumstances have a look at our best buy tables

Payday loans

If you only want to borrow a smaller amount of £80 to £750, and will be able to pay it off at the next payday or the one after, a payday loan offers another quick and easy solution. They can be arranged within a few hours over the telephone or online.

Even those with an adverse credit history can qualify provided they can prove they can pay off the loan at the arranged time. Payday loans might be good to use in emergencies, but you should use them with caution because the interest rates are high.

To get a Payday loan quote fill in our simple online form

Weigh up the costs

Whenever you borrow money you should add up all the interest and fees payable under the different methods and see which is the best solution for you.

Whatever you do remember you generally pay less the sooner you clear your debts - so be debt-free as soon as you can!

About the Author:

MoneyExpert - best personal loans, homeowner loans, best mortgage products

The Most Common Mistakes That Borrowers Do-New Car Loans UK

Author: Ben Gannon

“To err is human,” but this is no explanation for your slackness while taking any serious decisions. While making a choice for new car loans in the UK, the borrowers are overtaken by the ecstasy of a glinting brand new car. As a result of this, they seem to overlook the rational part of their minds and leave the whole researching task on to the dealers they might be heading for. And this is the worst mistake that borrowers commit. A few tips are enlisted below, which will give you an overview of new car loans UK. After reading this article, you will have a clear picture regarding do’s and don’ts of new car loans UK.

There is no compulsion on the borrowers to take the loan amount of that particular dealer, with whom you are going to buy your car. You can shop around various lenders and choose a loan amount that is in affirmation with your requirements and your financial status. The thing is very few people are capable to buy a brand new car with hard cash. Most of the UK residents materialise their dream by opting for new car loans UK.

For new car loans UK, the same car serves as a guarantee for the loan amount and can be captured by your lender, if repayment is not made on due time. You can make use of your unblemished credit record to qualify for attractive deals. You should have an idea regarding the penalties in advance and must have read all the terms and conditions of the lenders prior to sign the deal of new car loans UK.

In order to encounter the best deal of new car loans UK, you will have to submit some of your extra effort. You can conduct meticulous search through World Wide Web. There you can have a vivid picture of the existing trends in the market.

Ben Ganon is the author of this article. He is a senior financial analyst with Cheap Finance UK as an acumen for business and loans. He writes about various finance related topics. He is working with Secured Consolidation Loans.

To find Finance UK,bad credit finance, new car loans uk, personal finance, personal finance UK, business finance visit http://www.cheapfinanceuk.co.uk