Loans : amortization, and ''zero- and ''low-percent'' gimmicks

Amortization : How most loans work

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Amortization with extra principal	Loan.WK1
Daily APR, Pmts based on days-in-month	Loan_365.WK1

WK1 files will open properly in most industrial-strenght spreadsheets.

LOAN_365.WK1 doesn't open properly in M$ Works 4.5a, it doesn't support the @datevalue function. A later version might, try it. LOAN_365.WK1 can be viewed in M$ Works 4.5a by striking Okay (many times) to pass the error prompt when it appears. Offending formulas will load as numbers.

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''Zero-percent'' and other low-rate gimmicks : Auto loans

The cost of credit (interest) is anything you pay above the cash cost for the alternative to cash, borrowing and making payments over time. See Truth-in-Lending for details.

The typical auto loan gimmick is low-rate financing or dollars off. 0% financing or $3000 off, 1.9% financing or $2500 off, 4.9% financing or $1000 off, etc..

A Term of Art What zero-percent financing means is that zero additional financing is required, because the cost of credit (interest) is already included in the price. For logical legal reasons, lenders never refer to zero-percent financing as 'zero-percent interest.' Zero-percent financing's rate of interest is not zero (0%). 'Zero-percent financing' is sold in a two-price system where only the credit price is posted on the product. The cash price is the result of a calculation, 'after discount.' The 'discount' difference between prices is interest. The cash price is available to any buyer who can come up with the cash, which can mean borrowing the money from another source.

If you take the low rate financing, you're prepaying interest in the form of the discount you didn't take.

With the ''zero-percent'' gimmick, the larger your downpayment or the more valuable your trade-in, the less credit is extended, and the higher the interest rate you pay.

In most (if not all) cases, you're better off taking the dollar discount and, if you must finance, finance at a bank or credit union at the same or lower rate. At the same rate because, if your ship comes in (you get a raise) and decide to pay off the loan early, an early payoff of a ''zero-percent'' loan will increase the rate of interest further still since you've prepaid all the interest but used the borrowed money for a shorter time.

Find out what you're really paying for gimmick financing. Then shop for a better rate.

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Should you borrow or use your savings?

Interest not paid is money earned There's no difference between money not going out and money coming in, from an accounting point of view.

Credit is rarely extended to people who have no money. The typical borrower has money. That money is out to work at some rate of interest. Comparing the rate earned versus the rate on potential borrowing is only possible if one calculates the two rates. An advantage in either direction will be revealed by the difference in rates.

It pays to calculate the true interest rate on any credit offering.

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Calculate the cost of gimmick financing

Quick and dirty: a simple not-very-accurate way to compare different credit offerings is to add up all the payments.

Better methods exist:

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''0% or $3000 off'' could be 15.26 APR	Zero_Pct.WK1
''3.9% or $1500 off'' could be 9.77 APR	Low_Pct.WK1