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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: anializer who wrote (37164)	3/29/2010 1:00:53 PM
From: Jurgis Bekepuris	Read Replies (2) \| Respond to of 78748

It is LIKE A LOAN amortized over 5 years, since credit card companies charge very low minimum monthly payments. Two examples: Straight 1 year 3% loan for 100K. At the beginning you have 100K capital from the loan that you can use in any way you want (for example invest it). After 1 month you have to pay 100K/12=~8.3K principal + ~100K*0.03/12=0.25K interest = ~8.5K. You have 91.5K capital left. After 2 months you have to pay the same amount ~8.5K again. You have 83K capital left. And so on. 0% loan with 3% origination fee amortized over 5 years (in other words, minimum payment is low): At the beginning you have 100K-3K up front fee =97K capital from the loan that you can use in any way you want (for example invest it). After 1 month you have to pay about 1K minimum payment. You have 96K capital left. After 2 months you have to pay about 1K minimum payment again. You have 95K capital left. Notice that even after a month you have much more capital than in the case of the straight loan. Miracle? No, just math. If you invest the capital somewhere, let's say lend it as a straight loan yourself, the 0% loan with 3% origination fee amortized over 5 years (in other words, minimum payment is low) is much better than the straight 3% loan. And APR calculation reflects that. You are right, that if you don't do anything with the money you get (put it under the mattrass, use it to pay for non-productive asset such as a car), then straight loan is possibly better.