Monday, May 18, 2009

The price of lacking quantitative skills

Venta de Automobiles by Telstar Logistics, on Flickr
Creative Commons Attribution-Noncommercial 2.0 Generic License by Telstar Logistics

The price of not acquiring quantitative skills (which are developed in math courses) could be cost prohibitive. Recently, I watched the news a report on how people are getting into financial troubles when purchasing a new car. The problem is that more people are taking car loans in which they owe a lot more than the real value of the car. This is called an upside-down loan. People are making decisions of buying a new car based on no-down payment deals and longer terms to payback the loan to allegedly save a few bucks. Unfortunately, if they would have done the math, they would have realized they are not saving at all! Click the link below to read an article about the incresed trend of upside-down loans.

In a hole with an upside-down auto loan

"Upside down" means owing more on a car than it's worth. When a dealer knocks
down the value of your used car even further, the financial hole you're in gets
that much deeper.
"It's an alarming statistic that 40 percent of consumers are upside down."
How could this happen? It's easy. Just combine a low down payment or no down
payment with an auto loan with a longer term -- say five, six, even seven years.
Toss in the rapid depreciation that hits every new car in the first couple of
years and presto, you're upside down on your auto loan. Try to trade in your car
and you'll find yourself awash in negative equity.
Some folks make matters worse by rolling the old car's remaining debt into a new
loan. They're forced to pay interest and make payments on a car they don't even
own anymore. And tacking the extra debt on their new auto loan puts them upside
down all over again.
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1 comment:

Peter Cartwright said...

Its funny how i was just thinking about buying a car. Now, after reading this article my eyes are wide open. I always knew that there would be some "catch" in buying a new car, I KNEW IT! Knowing math is very essential when situations like this is present because if you dont know it then you will always find yourself in debt. "40% of consumers are upside down," thats almost half of consumers that are in a deep hole. After reading this article i will be very sure not to fall for those car dealers tactics with their "low monthly payments" trick! because know i know that i will be debt free when i have and dont have a car.