Article: Borrowing Money: Understanding How The Numbers Work - Free Reprintable Article

by David Berky
I would like to start out by telling you a true story. The names have been changed to protect the innocent, the ignorant and the dishonest.

John was interested in purchasing a new truck. John had done his homework and knew exactly what make, model and features he wanted on his new truck. He had visited several dealerships looking for the exact truck he wanted. He wanted to get it now and didn't want to wait to have one custom built.

Finally he found a dealership that had the exact truck he was looking for and he even liked the color.

Now it was time to negotiate the price and financing. John realized that he was not very good at numbers so he asked his friend Cindy to come along and help him make sure he was getting a good deal.

The salesperson looked up the pricing information on the truck and added in all the extra fees for tax, title, license, and what-ever-else-we-can-sneak-by-you. The total cost came out to about $22,000.

Cindy remained quiet while the salesperson explained the financing options that were available to John, checked John's credit and determined an interest rate for the loan. The salesperson then went to check with the manger to make sure the financing application was completed properly and to calculate the monthly payment.

The salesperson returned and announced that the payments on the 5 year loan would be about $420 a month. Cindy checked the numbers and agreed with the calculations. But John was a little shocked and disappointed.

Seeing his expression, the salesperson mentioned that the monthly payment may be more than what John would feel comfortable with and that maybe they could lower the payment by going to a 6 year loan instead.

John then looked to Cindy, who said that this would lower the monthly payment but John would end up paying more interest because of the longer time for the loan to be paid off. John wasn't too concerned about paying a little extra as long as he could afford the monthly payments (and drive his truck home today).

The salesperson asked John how much he could afford to pay each month on his truck loan. John indicated he could pay up to $375 per month. The salesperson then went to "get approval" from the manager to extend the length of the loan and to recalculate the monthly payment.

Upon returning the salesperson announced that he was able to "wrangle a good deal out of the manager" and was able to get the monthly payments down to, you guessed it, $375. John was excited. All he had to do was sign the papers and he could drive home with his new truck at a monthly payment he could afford.

But Cindy was curious. She asked to look at the numbers but this time the salesperson was a bit hesitant. The salesperson tried to change the subject one or two times, but Cindy insisted on seeing the numbers.

Cindy review the numbers and did some of her own calculations and found that the monthly payment on the truck loan should have been about $350 a month. So how did the salesperson come up with $375 per month?

After looking at the terms of the contract a bit closer, Cindy noticed that the price of the truck was now $24,500, an increase of $2,500. Cindy asked the salesperson why the price of the truck had just gone up? After trying to dodge the question and then blaming it on a mistake by the "finance department," Cindy and John walked out of the dishonest dealership.

As excited as he was to have his new truck, John was angered that the salesperson/dealership had tried to rip him off by taking advantage of his lack of understanding how the numbers in a loan relate.

John then had Cindy explain to him in basic terms how the number related and what to look for in the financing terms.

Cindy explained that there are four elements to a loan; the principal or amount you are borrowing, the interest rate, the time period and the monthly (or weekly, bi-weekly, etc.) payment.

And the numbers relate like this. If the amount goes up the payment goes up. If the interest rate goes up the payment goes up. If the time goes up the payment goes down.

So in the case of John's truck loan they extended the time so that the payment would go down. But the payment went down further than what John was willing to pay. So they decided to increase the amount so that the payment would match what John said he could pay.

But they "forgot" to explain to John that the price went up to make the payment hit his target. And they couldn't come up with a valid reason for the price increase when Cindy questioned them on it.

Without Cindy and her knowledge of how the loan numbers relate, John probably would have got his truck, but he would have needlessly over-paid $2,500.

John found a truck he liked even better at a different dealership, bought Cindy along to help make sure he was getting a good deal, and then took her out to dinner.

***************************************************************
© Simple Joe, Inc.
David Berky is president of Simple Joe, Inc. a marketing company that sells simple software under the brand name of Simple Joe. One of Simple Joe's best selling products is Simple Joe's Money Tools - a collection of 14 personal finance and investment calculators. This article may be freely distributed so long as the copyright, author's information and an active link (where possible) are included.

Note: This article may be freely distrubuted and reprinted as long as the author's information and web link are included at the bottom of the article. The web link should be active when the article is reprinted on a web site or in an email. Minor edits and alterations are acceptable so long as they do not distort or change the content of the article. For more information on reprint rights email:

Article Formatted for Email & Newsletters:

784 Words

Title: Borrowing Money: Understanding How The Numbers Work 
Author: David Berky

I would like to start out by telling you a true story.  The
names have been changed to protect the innocent, the
ignorant and the dishonest.

John was interested in purchasing a new truck.  John had
done his homework and knew exactly what make, model and
features he wanted on his new truck. He had visited several
dealerships looking for the exact truck he wanted.  He
wanted to get it now and didn't want to wait to have one
custom built.

Finally he found a dealership that had the exact truck he
was looking for and he even liked the color.

Now it was time to negotiate the price and financing.  John
realized that he was not very good at numbers so he asked
his friend Cindy to come along and help him make sure he was
getting a good deal.

The salesperson looked up the pricing information on the
truck and added in all the extra fees for tax, title,
license, and what-ever-else-we-can-sneak-by-you.  The total
cost came out to about $22,000.

Cindy remained quiet while the salesperson explained the
financing options that were available to John, checked
John's credit and determined an interest rate for the loan.
The salesperson then went to check with the manger to make
sure the financing application was completed properly and to
calculate the monthly payment.

The salesperson returned and announced that the payments on
the 5 year loan would be about $420 a month.  Cindy checked
the numbers and agreed with the calculations.  But John was
a little shocked and disappointed.

Seeing his expression, the salesperson mentioned that the
monthly payment may be more than what John would feel
comfortable with and that maybe they could lower the payment
by going to a 6 year loan instead.

John then looked to Cindy, who said that this would lower
the monthly payment but John would end up paying more
interest because of the longer time for the loan to be paid
off.  John wasn't too concerned about paying a little extra
as long as he could afford the monthly payments (and drive
his truck home today).

The salesperson asked John how much he could afford to pay
each month on his truck loan.  John indicated he could pay
up to $375 per month.  The salesperson then went to "get
approval" from the manager to extend the length of the loan
and to recalculate the monthly payment.

Upon returning the salesperson announced that he was able to
"wrangle a good deal out of the manager" and was able to get
the monthly payments down to, you guessed it, $375.  John
was excited.  All he had to do was sign the papers and he
could drive home with his new truck at a monthly payment he
could afford.

But Cindy was curious.  She asked to look at the numbers but
this time the salesperson was a bit hesitant.  The
salesperson tried to change the subject one or two times,
but Cindy insisted on seeing the numbers.

Cindy review the numbers and did some of her own
calculations and found that the monthly payment on the truck
loan should have been about $350 a month.  So how did the
salesperson come up with $375 per month?

After looking at the terms of the contract a bit closer,
Cindy noticed that the price of the truck was now $24,500,
an increase of $2,500.  Cindy asked the salesperson why the
price of the truck had just gone up?  After trying to dodge
the question and then blaming it on a mistake by the
"finance department," Cindy and John walked out of the
dishonest dealership.

As excited as he was to have his new truck, John was angered
that the salesperson/dealership had tried to rip him off by
taking advantage of his lack of understanding how the
numbers in a loan relate.

John then had Cindy explain to him in basic terms how the
number related and what to look for in the financing terms.

Cindy explained that there are four elements to a loan; the
principal or amount you are borrowing, the interest rate,
the time period and the monthly (or weekly, bi-weekly, etc.)
payment.

And the numbers relate like this.  If the amount goes up the
payment goes up.  If the interest rate goes up the payment
goes up.  If the time goes up the payment goes down.

So in the case of John's truck loan they extended the time
so that the payment would go down.  But the payment went
down further than what John was willing to pay.  So they
decided to increase the amount so that the payment would
match what John said he could pay.

But they "forgot" to explain to John that the price went up
to make the payment hit his target.  And they couldn't come
up with a valid reason for the price increase when Cindy
questioned them on it.

Without Cindy and her knowledge of how the loan numbers
relate, John probably would have got his truck, but he would
have needlessly over-paid $2,500.

John found a truck he liked even better at a different
dealership, bought Cindy along to help make sure he was
getting a good deal, and then took her out to dinner.

************************************************************
© Simple Joe, Inc.
David Berky is president of Simple Joe, Inc. a marketing 
company that sells simple software under the brand name 
of Simple Joe.  One of Simple Joe's best selling products is 
<a
href="http://www.simplejoe.com/moneytools/index.htm">Simple
Joe's Money Tools - a collection of 14 personal finance and
investment calculators</a>.  This article may be freely distributed 
so long as the copyright, author's information and an active link
(where possible) are included.

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Page Title:	Article: Borrowing Money: Understanding How The Numbers Work
Keywords:	borrowing money how numbers work relate free article information web site content website, free reprintable article
Summary:	This true story illustrates why you must understand how the loan numbers work when borrowing money - or you could get ripped-off.