Let's start with the concept I was being sold by the finance manager at Nissan, and then get into why he had no clue what he was talking about.
|No qualifications for the job? No problem!|
Here are the basics for those of you unfamiliar with it. If you have a debt, you can make two payments per month instead of the customary one. Each payment should be half the required payment. This means you are paying the same amount every month, but it will pay off the debt quicker.
How does it work? Simple. If you wait until the end of the month to make a payment, the interest compounds on the full balance you owe for the entire month. If you make a payment half way through the month, it will pay the interest accrued to date, and then reduce the principal. This, then, results in less interest being charged during the second half of the month. If you're following me, the end result is more money going to principal each month, less going to interest, and the debt wiped out sooner than later.
Still with me?
The finance manager offered this to me. It only costs an additional $2 per PAYMENT, but since it saves you so much money it is well worth it.
He could run a program to show me how much money I would save. I already knew the answer, but I thought I'd let him give it a whirl.
As he entered the terms of the loan I waited patiently. 60 months. $XXX per month payment. 0% interest rate.
The computer spit out the verdict - I would save over $2,000. That savings was after adding in the additional $240 of fees associated with the plan.
There was, however, one teensy, weensy, little problem. It's so small I almost hesitate to mention it, but I will - the computer was wrong.
The concept only works if you are actually paying interest. Since I now have a 0% interest rate, the only thing I was doing was paying off free money early. I asked him to explain what was I saving if I wasn't paying interest. Surprisingly, he didn't have an answer.
I explained to him, briefly, why the computer was wrong, and he seemed to get it. He planned on calling his represeantative to ask about it.
His very next question to me was this:
"Did you want to put any money down or borrow the full price of the car?"I simply told him
"I'll take all the free money you guys want to throw at me."