This couple could have saved nearly $34,000 in interest alone when making a $24,000 car purchase, by starting an IBC policy 4 years earlier.
Recently, I met a young couple with three little kids, two huge dogs, and a massive monthly mortgage payment. They both worked and were struggling to make ends meet.
In need of newer car, they visited a corner car dealership and happened upon the car they both thought they could afford. When the deal was finalized, they walked away with a three-year-old Ford Fusion they financed for $24,000.
With their credit already maxed out, they had no room for mistakes or unexpected expenses. And that’s not the nightmare.
What was keeping them up at night
What was keeping them up at night was not the $630 per month they had locked themselves into, rather it was the interest they were paying to the finance company! With an interest rate at 29%, it would take them eight years to pay it off! Their 5-year-old son would become a teenager before the Fusion was paid for.
Payments of $630 per month, totaling $60,480 over the next eight years, for a $24,000 purchase? The interest they will pay is $36,476, meaning the volume of interest is 60% ($36,476 / $60,480 = 0.60), not 29% (which is the rate of interest).
The interest alone is costing them more than two-and-a-half times what the car is worth!
I wonder if the salesperson and the owner of the corner car lot, who both knew the couple’s situation, felt like they were doing a service for these customers, or if they felt like they had just pulled off an armed robbery? It’s insane!
Please do not get me wrong. I am not blaming car-sales people. Every industry has a few bad asses. Thankfully, the majority are upstanding and good people providing a needed service to their customers.
Greasing the wheels of the auto-financing industry
What I find most amazing is that it is legal to charge 29% in this low-interest-rate environment. But we can’t be so naïve as to think that lenders are not out for blood. They would eat their young if they could. Of course, the couple were paying this insane rate as a result of having bad credit, but more importantly they agreed to it, not understanding basic economics.
Aren’t we proud of our education system where we can graduate from high school knowing how to dissect a frog and calculate the square root of 100, but not knowing basic financing? Where was the class in that?
Realizing their situation, this couple tried to consolidate the loan at their regular bank. Unfortunately, they got turned down, so for now they are greasing the wheels of the auto-financing industry.
The nightmare continues
What about their mortgage?
If mortgage rates increase by a percentage or two when this couple goes to renew their mortgage (and they likely will!), they could face losing their house. If you think this is an extreme example, I can tell you I have seen my fair share of similar financing horror stories.
Let me ask you a question: Is there more profit margin on the sale of a car or on its financing? If you said financing, you get to be salesperson of the month! Financing, as an industry, is extremely profitable, and this is one reason why thinking like a banker and implementing IBC can serve you well!
Putting IBC into practice
If this couple had practiced IBC four years earlier and had been putting that same $630 per month into a properly structured life insurance policy, building up its cash value to where it surpassed the cost of the car ($24,000), how different would life be for them now? They could have taken a policy loan and paid off the car financing company with cash! Then repay their policy loan at $630 per month which would have been 3.5 years, not eight years. The approximately $2,600 in interest that the life insurance company would have charged them could have been more than compensated for with the cash value inside the policy, which would have kept compounding while they paid off the loan! (On the other hand, they could decide not to repay the policy loan, or hold off, or, just pay the interest only).
After 3.5 years, they could have paid off the loan and every loonie they borrowed would be available to them to borrow again. They could have knocked off 4 years of payments, ended up with the car, and nearly all the money they paid for the car! Imagine the difference this would make over their lifetime if they bought all their future vehicles this way!
In a nutshell, IBC brings banking back to the “you and me level” where we build up our own pool of wealth in our policy, and in this case, take a policy loan, pay for the car with cash, then systematically repay our loan back to our policy.
If you would like to know more about IBC, please let us know.