Debt Management and Financing Options

Disclaimer

Speaker is not a financial advisor.
Speaker's risk tolerance may differ due to age and personal financial situation.
Personal example: driver of a 1998 car with no car payment.

Focus on debt management, commercial loans, and significant financial transactions.
Key topics: common loan terms, amortized installment loans, car financing options, and credit card processing.

Types: car loans, mortgage loans, appliance loans.
Majority of loans are installment loans except short-term business loans.
Interest in each period is based on the remaining loan balance.
Example: $1,000 loan over 4 years at 10% interest.
- 4 payments of $315.47 annually.
- Breakdown of payments: Initially, more goes towards interest ($100) and less towards principal ($215.47).
- Loan balance decreases over time ($784 after first year).
- Proportion of interest and principal changes annually.
Annual Percentage Rate (APR) includes fees beyond just the interest rate.
Loan terms and fees: Application fee, loan origination fee, mortgage insurance, closing costs.
Periodic Interest Rate: Does not include fees, unlike APR which does.
Term of Loan: Shorter loans incur less interest overall.

Options: Pay cash, take a loan, or lease.
Installment Sales Contract: Down payment and monthly payments go towards ownership.
Lease: Payments made for term of lease, no ownership at the end.
Example: 2017 Chevrolet Cruze Sedan.
- Assumptions: 15,000 miles/year, same fees for all options.
- Depreciation over 4 years: 50%, personal savings rate at 3% per year.
- Financing Options: Paying cash, taking a loan, or leasing.
- Cash purchase: $20,204 after discount.
- Loan: 10% down payment, 1.9% APR, $484 monthly payments for 48 months.
- Lease: 10% down payment, $239 monthly lease payment for 48 months, $395 disposition fee.
Calculation of present value for each financing option to determine the most economical choice.
- Paying cash often economical if funds are available.
- Leasing may be cheaper under current low-interest conditions.

Types: Fixed rate loans, adjustable-rate mortgages.
- Fixed Rate: Rate remains the same for the loan term.
- Adjustable-Rate: May increase after an initial fixed period, with caps.
Down Payments: Typically 5-20%; 20% avoids additional fees like private mortgage insurance (PMI).
Closing Costs: Typically 3-7% of the loan amount.
Points: Upfront fees to reduce interest rate, lowering monthly payments.
PITI: Principal, Interest, Taxes, and Insurance included in payments.
Private Mortgage Insurance (PMI): Needed if down payment is less than 20%.
Example quotes: 30-year fixed, 15-year fixed, 5/1 ARM with respective rates, APRs, points, and monthly payments.