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SAug 3, 2012

Honey, I Hocked the Car!

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I have a confession to make. I hocked my car.

Yes, your stalwart, ever prudent, trousers rolled, personal finance columnist borrowed against his car. In 40 minutes I went from being a guy with no car payments — a guy who hasn’t had a payment book in years — to being a debtor committed to 60 equal monthly installments.

The credit union that I visited had advertised, as others have in cities around the country, that they would make 5-year car loans, on not-new cars, at an interest rate of 1.99 percent. That’s close to irresistible.

I had to join the credit union, of course, but that wasn’t exactly a big deal.

The new accounts person asked for a $25 account deposit. Then she held up a small mirror and asked me to breathe on it. It fogged quickly.

“You’re in!!!” she said.

(Just kidding, she didn’t really make me fog a mirror.)

She then had me complete a loan application. It was short. Very short. I found myself wondering if there were some way to communicate this simplicity to the worshippers of Franz Kafka who process mortgage loans.

 “How much do you want to borrow?” she asked.

I said, “How about $30,000?”  That seemed a reasonable amount for a 2010 Lexus RX 350 with 35,000 miles on it. (Forgive me; our other car is a Prius.)

“Just remember you can’t raise the amount later,” she chided. “But if you ask for more you can always reduce the amount to what can be loaned.”

I raised the request to $35,000.

A few minutes later the request was approved for $33,000 based on an estimated car value of $35,950, a heroic 87 percent of its purchase price 30 months ago. A few minutes after that I was out the door, holding a newly minted cashiers check.

Why did I borrow the money?

Simple: It will save me money. Debt is the new thrift. While the Burns family doesn’t have a home mortgage, we do have a home equity credit line, at 3.99 percent. It was used to buy a lot adjacent to our home. So $33,000 of the 2 percent loan would pay down $33,000 of the 4 percent loan. Not bad for a 40-minute effort.

Several things are worth noting here. First, tax deductions are not a consideration. If your interest bill goes down by 50 percent, who cares if the new interest is tax deductible? Second, the new debt has more risk to the new lender than the old debt had to the old lender. Before, a small amount of money was borrowed against a house worth far more and with no mortgage. Now, a lender was risking the value of the collateral and charging half as much interest.

Go figure.

Sure, this isn’t a big deal. The actual benefits to me aren’t that large. In the first year I might save about $600 in interest. On the other hand, that $600 is enough to make about 30 visits with grandsons to their favorite fine dining venues: Dairy Queen, McDonald’s, Sonic and WhataBurger, all of which happen to be conveniently located in Dripping Springs, Texas.

Paying the remaining interest isn’t a burden, either. At 1.99 percent, anything I pay in interest probably won’t be enough to offset the loss of purchasing power the money I pay back will suffer over the next 5 years. At the end of June, for instance, inflation had reduced the purchasing power of a dollar by 9.9 percent over the preceding 5 years — even though one of those years, 2009, was a rare year of price deflation, the first since 1955.

Indeed, my ancient but trusty Texas Instruments financial calculator tells me that if inflation runs at the 3 percent rate it has averaged over the last 30 years, the $34,674 in payments that I make on this $33,000 loan will only have a purchasing power of $32,161. In effect, I am being paid to borrow money. I’m not being paid much, only $839 in current purchasing power over 5 years, but as I’ve already pointed out, it’s a lot more attractive when measured in breakfasts or lunches with grandkids.

It also compares quite favorably to the free promotional Stick-in-the-Eye now being given to depositors with each new 5-year CD.

Filed Under: Financial Planning