Car dealers offering to add your credit card debt into the loan?

1000yards · #1 01-21-2015, 08:38 AM

On the radio lately there have been quite a few commercials advertising local dealers that want to sell you a new car, and will pay off your credit cards and add the amount to your loan instead.

My question is how does this work? Does anyone have any experience?
I could see the benefit of it if it reduces your monthly payments, gets your a reliable vehicle and has a lower interest rate than your credit cards, but kinda seems like going into more debt to try and fix your debt problems already...

Sooner · #2 01-21-2015, 08:49 AM

I bet there is a limit of what they will take off your credit card but if you can reduce your interest rate that's good. The devil will be in the fine print on this deal.

wags · #3 01-21-2015, 09:00 AM

Essentially, banks/financial institutions will finance a vehicle at MSRP + 10% (some will vary, but in that range). With the incentives you can get on vehicles - sometimes 1000's of dollars below MSRP - that leaves room to add the debt. Send for financing at the full loan amount, cut you a cheque for the difference between actual purchase price and loan amount, use the cash to pay off your credit cards.

Cheers

Okotokian · #4 01-21-2015, 09:03 AM

If your credit card debt is that large that you find the offer attractive, you probably shouldn't be borrowing more to buy a new car.

EZM · #5 01-21-2015, 09:17 AM

Financial institutions (who work with the dealers) are trying to get your business. They would love to finance ALL of your debt. Seems brilliant.

If you are looking to add more debt in the form a shiny brand new car, before paying off your credit card at 20% and you have no self control and really need that new car ... hell why not? lol

After all I am trading my debt at 20% for a better rate at .... say 8% ........ right? lol

Hang on ........ do the math carefully - adding $30,000 of added principle (new car) to your existing $10,000 credit card debt might equal $40K of NEW debt @ 8% ($3200/yr) over the next 7 years = $22,400 of interest alone plus the $ 40K in principle for $63,000 of new debt.

This debt will result in a $480 payment .... that could have been added to your credit card - and payed off in 18 months (along with your interest portion of your regular payment).

Doesn't paying off the $10K @ 20% ($2000) over a one year sound like a better option?

Interest rate reductions (refinancing or consolidation) may allow you to pay your debt down faster. But you gotta do the math.

Too many people can't do the math and get trapped further and further .........

Any mechanism that let's you reduce the amount of interest versus principle, or reduces the term of repayment is a good idea.

Be careful ........... sounds great .......... but it's unlikely adding to the principle debt amount is going to help your situation if you are paying down your credit card month over month ........... your issue is cash flow. The root cause is something else .... but I will leave that up to you.

Do the math.

EZM · #6 01-21-2015, 09:18 AM

Quote:

Originally Posted by Okotokian

If your credit card debt is that large that you find the offer attractive, you probably shouldn't be borrowing more to buy a new car.

yup ......... the root cause .......... right there.

Agree 100 percent

1000yards · #7 01-21-2015, 09:31 AM

Okay, glad my gut was right.
More debt to try and fix debt = bad idea. lol thanks all for explaining why!

bosshog · #8 01-21-2015, 09:32 AM

Quote:

Originally Posted by Okotokian

If your credit card debt is that large that you find the offer attractive, you probably shouldn't be borrowing more to buy a new car.

x1000. I haven't searched for the numbers but I'd be curious to see what current Alberta household debt ratios are right now.

JimPS · #9 01-21-2015, 10:55 AM

Quote:

Originally Posted by Okotokian

If your credit card debt is that large that you find the offer attractive, you probably shouldn't be borrowing more to buy a new car.

Americans had a mortgage loan bubble that burst.

Canada has a car loans bubble about to implode.

Banksters are nervous.

Too many people are driving new vehicles that they can't afford. They bought them with zero down. They have no equity in them, they are financed with credit card debt and they are worthless collateral for the outstanding loans. In many cases the "owners" can't even afford to do regular maintenance.

http://business.financialpost.com/20...ing-time-bomb/

badger · #10 01-21-2015, 11:04 AM

Finally, I was trapped against the credit limit of my cards and minimum payments, this is a way out. The banks are holding me back from living the lifestyles of the rich and famous, it's not that I can't afford it based on income.

JonBoy · #11 01-21-2015, 11:27 AM

Quote:

Originally Posted by EZM

Financial institutions (who work with the dealers) are trying to get your business. They would love to finance ALL of your debt. Seems brilliant.

If you are looking to add more debt in the form a shiny brand new car, before paying off your credit card at 20% and you have no self control and really need that new car ... hell why not? lol

After all I am trading my debt at 20% for a better rate at .... say 8% ........ right? lol

Hang on ........ do the math carefully - adding $30,000 of added principle (new car) to your existing $10,000 credit card debt might equal $40K of NEW debt @ 8% ($3200/yr) over the next 7 years = $22,400 of interest alone plus the $ 40K in principle for $63,000 of new debt.

This debt will result in a $480 payment .... that could have been added to your credit card - and payed off in 18 months (along with your interest portion of your regular payment).

Doesn't paying off the $10K @ 20% ($2000) over a one year sound like a better option?

Interest rate reductions (refinancing or consolidation) may allow you to pay your debt down faster. But you gotta do the math.

Too many people can't do the math and get trapped further and further .........

Any mechanism that let's you reduce the amount of interest versus principle, or reduces the term of repayment is a good idea.

Be careful ........... sounds great .......... but it's unlikely adding to the principle debt amount is going to help your situation if you are paying down your credit card month over month ........... your issue is cash flow. The root cause is something else .... but I will leave that up to you.

Do the math.

Correct conclusion, wrong math.

Your interest rate is not 8% on the total principle for the entire loan and thus your interest isn't $3200/year. The interest is only charged on the remaining principle, so your interest costs drop each year.

$30,000 at 8% over 7 years is a payment of $467.59 per month with a total interest cost of $9277.56 over those 7 years.

$10,000 at 8% over 7 years is an additional $155.86 per month, for a total interest cost of $5,586 ($66.5 per month in interest) over those 7 years.

Total interest on $40,000 over 7 years is therefore $14,863.56 (not $22,400, as you stated).

$10,000 at 20% over 1 year is $926.35 per month, for a total interest cost of $1,116.20. But someone rolling in that loan is NOT going to pay it off in 1 year because they obviously can't afford it. Chances are, it'll take them three years to pay that off (if they're lucky).

$10,000 at 20% over 3 years is $371.64, for a total interest cost of $3,379.04. Those payments are "reasonable" for most people (especially people that finance over 7 years) and are still definitely the smarter move.

TL;DR - for this scenario, the break-even point is roughly 5 years. If you can't pay your credit card debt off within 5 years, you're better off rolling it into your car payment. If you can pay it off before 5 years, you're better off paying it down yourself.

Kim473 · #12 01-21-2015, 12:16 PM

If you own your home, take out a line of credit and pay both off at less than 3% interest. Then make large payments to this biweekly. Both will be payed off in no time.

KGB · #13 01-21-2015, 12:44 PM

The "free" cheese is only in a mouse trap.

EZM · #14 01-21-2015, 01:32 PM

Quote:

Originally Posted by JonBoy

$30,000 at 8% over 7 years is a payment of $467.59 per month with a total interest cost of $9277.56 over those 7 years.

$10,000 at 8% over 7 years is an additional $155.86 per month, for a total interest cost of $5,586 ($66.5 per month in interest) over those 7 years.

I just ran the numbers through a loan calculator (instead of my head) ... we are both wrong. lol.

If the rate is equal at 8% for both loans and one loan is for 30,000 and the other is for 10,000 the interest should be 3 times more for the loan where there is 3 times the principle.

Your math shows an effected aggregate interest of $9277 on the $30,000 ( at 31%).

So why would the $10,000 loan come in at 56% ($5586) if the interest rate and amortization period was equal?

Anyways .......... no big deal .........The loan amounts would be aggregated .... to one loan rate at $40,000, 8% (or more) with a 84 month amortization - not two separate loans anyways. It's really a consolidation for an over leveraged and under secured loan.

I'm sure the interest rate would be higher than 8% in this case anyways....if they were even to fund this loan. I wouldn't.

Either way .......... the point is the same.

Pay off the credit card !!!!!! then get a new shiny car !!!!!

EZM · #15 01-21-2015, 01:34 PM

Quote:

Originally Posted by KGB

The "free" cheese is only in a mouse trap.

well played ...... love it ........ never heard that before .......... now I'm going down the hall to use it in a sentence or conversation somewhere.

KGB · #16 01-21-2015, 01:59 PM

Quote:

Originally Posted by EZM

well played ...... love it ........ never heard that before .......... now I'm going down the hall to use it in a sentence or conversation somewhere.

I just pictured that and still laughing....

Doodle30 · #17 01-21-2015, 02:17 PM

Quote:

Originally Posted by 1000yards

Okay, glad my gut was right.
More debt to try and fix debt = bad idea. lol thanks all for explaining why!

Technically this isn't more debt to fix a debt issue. ASSUMING that you are going to buy the car anyway. I have to assume that noone is going to buy a car just so that they can consolidate CC debt. So you actually have the same debt it's just consolidated which as stated can be a good thing.

Again that's assuming that you have made up your mind and you are buying the car no matter what. As others have stated the CC debt gould be paid off first then get a car.

Many are talking about the new credit bubble in the US. Sub-prime car loans.

mcgimp · #18 01-21-2015, 02:35 PM

A deal like this would be ok if you could resist running up your credit card debt in the future.
Otherwise you are just digging a bigger hole. I agree that if you are in a position that this deal looks good it is probably a bad idea.

billie · #19 01-21-2015, 02:45 PM

While it is sound advice to pay off debt before incurring more, it is not hard and fast.

Take a non-mechanically inclined person and a lower priced "new" car with warranty (and possibly a maintenance program) gets you to work and reduces the likelihood of significant repairs on an older used car. One significant repair and it suddenly makes more sense for some.

Every situation must be considered on its own merits.

schmedlap · #20 01-21-2015, 04:18 PM

Quote:

Originally Posted by Okotokian

If your credit card debt is that large that you find the offer attractive, you probably shouldn't be borrowing more to buy a new car.

Just sucking you in to more debt. "Consolidate" what you have so the monthly payments are less, but run the interest out over longer time periods, and open up more room to run up new credit card debts. Very bad idea for the borrower, but if so many people are that clueless ...?