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| Photo by Scott Ellison |
Welcome back savvy reader. Today we have Monty the Money Monkey with us to teach us more about term debt.
Monty the Money Monkey straightens his spectacles and tugs his lapels down smooth. He sits behind a desk carved from the heart of an ancient mahogany world tree. Something about his monkey beard makes him appear super wise. He has resting frownie face syndrome, I can't tell if he is disappointed or deep in thought. "With a Term loan the applicant gets all the money up front and pays the bank back over a fixed term. Used in this sense term refers to the length of the loan. For example the term on my car loan is 3 years. This means that if I pay exactly the minimum payment amount on exactly the due date each month the math works out for the car to be paid off in 3 years."
We are out of the office and out on the roadway now. Monty the Money Monkey is driving his luxury car along a winding coast adjacent cliff. He drives with the measured confidence of a professional driver. He has his driving gloves on. He is in the zone. He turns to the camera as if you were in the passenger seat with him. "The interest rates on new car loans can be very favorable for those with good credit. The dealership already has a financial incentive to sell you the car, so making money in interest isn't always necessary for the deal to be profitable. Even for used cars there is valuable collateral securing the loan which typically makes the rates lower than unsecured loans. Since my credit is immaculate the interest rate they offered me was so low it was more productive for my assets to be deployed elsewhere." That's Monty for you, he's telling you a story about financing his car and he has to make sure you know that he could have just bought it in cash. You know, if he WANTED to. If it was even efficient for him to pay for things with all that money he has. Must be nice.
Monty the Money Monkey swings his fancy luxury car into the local Bank of Barry the Banking Bison. Monty strides in there like he owns the joint. Barry is trying to appear deferential to Monty, but he is having some difficulty doing so on account of Barry being a 1955 pound Buffalo.* Barry the Banking Bison ushers Monty into his office and brings up Monty's car loan on his computer, turns the screen so that Monty and you the viewer can see it. Monty's loan account number is not blurred out. Monty turns slyly to the camera and says "You can't access money from a term loan in the way that you can from a line of credit. What are you going to do with that account number? Pay my monthly loan payment? I wish you would pay my monthly payment." Monty is smirking but there was something about his tone that seemed oddly sincere.
The numbers on Barry the Banking Bison's screen show a series of payments on Monty's fancy foreign luxury car. Every month the payment amount and interest rate stay the same. The amount of total principle paid increases every month. The amount of total interest paid each month decreases. Monty the Money Monkey explains this conundrum for us. "The amount of interest that is charged each month is a function of a fixed interest rate being applied to the outstanding principle balance. Each month a portion of my payment goes towards principle. The fixed interest rate is being applied to a slightly lower amount each month as the principle gets paid down. If I were to pay more extra towards the principle this would decrease the interest paid over the life of the loan. It typically is a financially beneficial move to make extra payments to principle." Not like Monty is following his own advice based on the screen. I guess he's just too rich for it to make sense for him, but you know it would make sense for the REST of us.
"While I'm still making payments on the fancy foreign performance luxury car the bank holds the title to the vehicle." Monty the Money Monkey motions to Barry the Banking Bison as if Barry personally has all the titles with him right now. Barry looks a bit sheepish for a bison and he smiles and waves awkwardly. "While the bank holds the title I am required to have comprehensive insurance on my vehicle. Comprehensive insurance is very expensive on such a nice vehicle." Monty adjusts his spectacles. Was he squinting as a natural part of that adjustment, or did he just narrow his eyes at Barry the Banking Bison? Is the frown deeper than usual? I can never tell with this guy. Barry looks quite put on the spot and he looks he is trying to quickly formulate a response. Before he can get a word in edgewise Monty continues. "It is only right that the bank would require me to insure the vehicle. As the collateral used to secure the loan the bank has an interest in insuring that the vehicle is insured." Barry looks visibly relieved by this turn in the conversation and he gives the camera one hoof up.
Monty is walking out of the bank now and getting back into his fancy foreign performance luxury super car and pulling out of the parking lot. He turns back to the driver's seat to address you directly. "Having a new monthly payment for several years is a big commitment. Before taking on any new debt it is important to make sure that you will be able to afford this new payment. If you have the luxury of time I suggest opening a savings account and making a deposit each month in the amount of the new monthly payment that you are considering. If you can comfortably set this amount aside every month without dipping into your savings than you know you're ready to take on that new payment. As a bonus you will have some cash set aside as a down payment when you finally go to make the purchase."
We hope you found Monty's advice helpful. Keep in mind that not everyone can drive a fancy shmancy foreign performance luxury super car like Monty can. If you have the choice between looking rich and being rich, always choose being rich. Put another way, don't spend all your money trying to look like you have money you don't have. Many folks fall into the trap of buying a car that takes up a large percentage of their income. Remember that the sticker price is only a small percentage of the true cost of vehicle ownership. Until next time loyal readers, stay smart and take some personal responsibility for your finances.
* 886.77 Kilograms for the rest of the world.
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