Posted by
jose319
11 yrs ago
We wanted to finance our purchase of a new car, but the calculations used by the dealership was somewhat surprising. Instead of using an amortized loan calculation (as they would in the US), the dealer here uses a calculation based on the annual interest. For example, if the purchase price were HKD 500k, and the interest rate 2%, the dealer would take the $10k annual interest payment charge, and multiply it by the number of years of the requested financing (e.g., 50k for a 5 year loan, as opposed to <26k using the US method). This would bring the true cost of financing under the US method to almost 4%.
My question is if this is truly the standard practice in HK, or if the car dealer is trying to overcharge me? If this is the standard practice, then are mortgages and other personal loans (e.g., credit cards) also calculated using this method?
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So, would you also "save up" and buy your house in cash?
Does anyone know?
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Jose,
I always hire purchase my cars. not because I can't afford the cash (as laser1234 implies), but because interest rates are so low it is almost free money.
Not sure of your answer, but ask for the finance company official guide to see how it is calculated. from memory my Volvo XC90 hire purchase is usually about 2.8%.
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Adolf - in my personal opinion you are completely incorrect.
If I have money invested in high yield products paying 10% yield and cost of funds is 1.9% - I would be a moron, or il-advised to take funds out of my high yield investment (causing me an effective 8% loss), when I could fund the purchase at less than 3%.
Any one making such an ignorant comment in general terms doesn't have much idea of wealth creation.
But I do agree for people with very, very limited knowledge of financing/wealth creation/leverage should do as you do. And that is pay cash for everything & not invest or create any wealth during times of almost zero cost funding...
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Interesting one! A significant amount of IB's use finance, basically they make more by investing that they do servicing interest payments.
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Yes, this kind of chicanery is standard practice in Hong Kong...
The implication is that your effective interest rate is MUCH higher than the 2-3% rate they have quoted.
For example, and 36 month load @2.8% with a 1% handing fee, you're actually paying > 70% interest ! Suddenly paying cash looks smart.
Bank of China has a tool to convert (no need to be a customer)
http://www.bochk.com/web/tools/calculators/_flat_rate_vs_apr.xml?section=tools&level_2=calculators&fldr_id=563
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That is correct, morons use cash. An example was to buy the shares of IBs when they were forced sellers in times of volatility due to margin calls, like 2008-2009 or to buy property in SARS. If only we put it all on the credit card...
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CaptDave - that calculator is based on monthly flat rate - not annual rate. An annual rate of 2.8% with no handling charge - as offered through Volvo finance is actually a rate of around what is quoted.
A better calculator for Hire Purchae/leasing is here: http://www.efunda.com/formulae/finance/lease_payment.cfm
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