Questions About Debt
March 2005 - eNewsletter

What about a 0% interest loan?
If you have debt, you want the interest rate to be as low as possible. Therefore 0% interest seems ideal for a big ticket item like a car. Think about it, no business can afford to give anything - even interest - away for free. Banks never offer 0% interest loans because they have nothing to mark up for a profit. Often 0% interest loans are offered when purchasing a new car with the trade- off of losing the cash rebate offered. When purchasing anything, always determine or negotiate the cash price first. This will help you clearly see how a 0% interest loan, if offered, may actually have a cost.

Is a “same as cash” offer a good deal?
Many retail stores now offer “same as cash” financing for a period of time. You do not pay more than the purchase price as long as you pay off the entire purchase within a certain time frame. The catch is that if you fail to pay off the loan in time, all the finance charges are immediately put into effect. My wife and I recently purchased a new washer and the retail store offered “same as cash” financing for two years - if we paid off the loan within two years, we would not have to pay any finance charges. This works for us because even though we have the money to pay off the debt now, we can earn interest in our savings as we pay this off over the two year term. The danger is that if we have to use the money in savings for something else and cannot pay off the loan within the time frame, then all the interest charges would apply. In this case the APR is 19.8% and the accrued interest after just 3 months is 5% of the original purchase price. Yes, “same as cash” can be a good deal if you have the money to pay for the item, but make sure that you will be disciplined to pay it off or the item would not be cheaper than if you just paid cash.

Shouldn't I invest when I can earn 10% in the stock market versus the 8% cost on my debt?
Anytime you can earn more on your investments than you are paying on your debt you come out ahead. The inverse is true if your debt cost more than your savings or investments. The catch is that to get a higher rate of return than that offered by deposit and short term savings accounts, you have to begin to take RISK. Risk can put you behind the “eight ball” because higher returns simply are not guaranteed. We have had numerous people come to us regretting the fact that they invested their money instead of paying off debt because their high return investments went south. However, we have had few clients, if any, who ever regretted eliminating debt. A good litmus test for this decision would be to look at the years 2000-2002 when the stock market fell over 40%. If someone had $10,000 to invest or pay off debt and chose to invest in the stock market, the $10,000 could have gone down to $6,000, or less, and they would still have the debt.

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