DEALER FINANCING

IF IT SOUNDS TOO GOOD TO BE TRUE YOU'RE PROBABLY RIGHT

You can see these ads in the newspapers almost every week. Choose a $1500 rebate of 2.9% financing. Choose a $2,000 cash rebate or 0.00% financing. And so on.

Who would even consider going to a credit union or bank for a car loan with so many bargain rates available from the dealers? Who would want to pay "market prices" for a loan, when there are cheaper alternatives?

If the dealer's financing offers sound too good to be true, you are well advised to trust your instincts and do some calculations. Consider this example. In the first week of September, select dealers in the Metro Toronto were advertising 2005 clear out sales with a choice of a $2,000 rebate or 0% financing.

Is zero percent financing a "good deal" for a car loan? At the time of the offer, it was definitely lower than the rate you would be quoted at a credit union or bank for a car loan.

A true comparison of the real cost, however, requires an additional consideration. Car dealers are required by regulation to fully explain their advertised financing offers. This is done in fine print at the bottom of the ad that is filled with jargon, acronyms and math that will not be understood by the average consumer.

THE TRUE COST OF BORROWING

In the example noted above, the following could be learned from the fine print.

If you borrowed $15,000 for 24months at 0% the total interest cost would be ofcourse $0.

However, this is not your true cost of borrowing. To obtain a true cost of borrowing ( or "C.O.B." as they often say in the fine print), you should add the cost of the "lost " rebate, since this is the cash you would have had in your pocket had you borrowed the money elsewhere.When you figure this into the equation, your actual cost of borrowing is $2,000.

Now compare that to a PenFinnancial car loan of, lets say, 10%. The cost of borrowing $15,000 ($22,000 less the $2,000 rebate) for 24 months would be $1069.66.

The PenFinancial carloan would actually end up saving you $930.34!

PENFINANCIAL'S CREDIT UNION LOAN STAFF CAN HELP

Where does this leave the borrower? Until regulations eliminate deceptive advertising for car financing, consumers are at a major disadvantage.

In the meantime, our loan staff will be pleased to help Credit Union members do objective comparisons of various financing options for various rates and terms. In some cases, you may discover that a traditional car loan is cheaper and /or more flexible. In any case, the numbers will tell the story.