From: jeq@i88.isc.com (Jonathan E. Quist)
Newsgroups: rec.motorcycles
Subject: Re: New Bike Financing Advice Sought.
Date: 31 Jul 92 15:22:52 GMT
Organization: INTERACTIVE Systems Corporation, Naperville, IL

This is a bit long.  If you don't care about financing, don't bother,
but the gauntlet has been flung.

Lots of people wrote:
>>: 
>>: Stay AWAY from variable rates unless you are a) an economist and b) an
>>: accountant. As I pointed out, anything below 15% is not astronomical these
>>:
>>   I have to agree.  Variable rate loans *suck*.  Avoid them.

Why is everyone so paranoid about variable loans?  Especially with
rates that low?  Unless you examine it, you can't tell.

Look at an example.  Numbers are from an approximate formula that I've
used successfully for about 6 years - payments from my formula have always
been within 1% of what the bank asked for.  (For those who care, I'm
using the monthly equivalent of the annual rate, and computing interest
monthly.)

To keep numbers simple, I'm assuming a 3 year loan term, with a principal
amount of $10000.  (The price of the bike, in other words, is $10k plus
the downpayment.)

So, for the dealer's 15.99% loan, we get:

36 payments of $351.52
total of 12654.75 on principal of 10000.00

For a baseline, a fixed-rate at 8.5% would be:

36 payments of $315.68
total of 11364.31 on principal of 10000.00

or $1290.44 less than the 15.99% loan.

Now, if you can deal with the payment size on the 15.99% loan,
apply that towards the lower rate.  Prepaying this way, again
assuming the unlikely fixed rate of 8.5%, we get:

Prepay:  31 payments of $351.52 + final payment $307.79
total of 11204.76 on principal of 10000.00

(This of course won't happen, but it was already on my screen,
so what the heck.)

Now, about the variable rate.  Okay, to keep it simple, I assumed
that over the course of the next 3 years, the Prime Rate rises 8%.
(Anyone care to comment on whether that's likely to happen?)  And
again, to keep it simple, I assumed a linear rise in interest rate;
in other words, our 8.5% loan, assuming it's tied to the Prime Rate,
would have a rate of 16.5% after 36 months.  So using the same
prepay rate (i.e., the same monthly payment as the dealer's 15.99% loan)
we get:

Prepay w/increment:  32 payments of $351.52 + final payment $350.44
total of 11598.93 on principal of 10000.00
final rate 15.61%

In other words, you've payed off the loan 3 months earlier than you otherwise
would have, and the financing cost you $1055.82 less than the fixed rate
loan.  With the variable rate loans so cheap these days, and the fixed
rate loans still high (since they're fixed, they have to have higher
rates to manage risk for the lender), you'd have a hard time convincing
me to go with the fixed-rate loan.

Again, all of this varies from loan to loan; whether the interest rate
is capped, or not, what the rate is indexed to (most common
is the Prime Rate plus a constant), and whether overpayments apply
towards principal or interest.  Also, for a given bike, a 15.99% loan
requiring only 10% down will work out differently than the lower
rate at 25% down.  If you can afford a larger down payment, do it.

Trying all this again, say the purchase price is $10k.  (And assuming
that includes all tax, etc.)  At 15.99%, 10% downpayment:
$1000 down + 36 payments of $316.37
total payments of 11389.28 on principal of 9000.00

Total cost $12389.28

At 8.5% variable, 20% downpayment:
Initial payment would be $252.54.  My program can't yet deal with a variable
payment loan, so by adjusting up for equal payments:
35 payments of $261.89 + final payment $260.26
total of 9426.42 on principal of 8000.00

And, for the variable loan with the same payments as the fixed rate:

$2000 down + 28 payments of $316.37 + final payment $220.83
total of 9079.20 on principal of 8000.00
final rate 14.72 per year
Total cost $11079.20, or $1310.08 less than the fixed rate loan. (Plus
8 months less payments.)


If anyone cares to send me any arbitrary formula for interest
rate increases, or perhaps a table of projected (or historical)
interest rates, I'll plug it into the program and see what I get.
Regardless, I think it's pretty clear that, especially for short-term loans,
variable rate loans can be advantageous.
-- 
Jonathan E. Quist                              INTERACTIVE Systems Corporation
jeq@i88.isc.com  '71 CL450-K4 "Gleep", DoD #094        Naperville, IL
        There are many things a person should experience in a lifetime.
       Among them are an infant's first cry, and an infant's first laugh.