Fire Truck Financing: Be careful about this con game

I came across the boldest financing con game of my life the other day. I received a call from a department who asked me to review their financing offers. They thought the best offer was an offer of 4.5% - which was well below any other offers.

It seemed too good to be true... and it was. First, some background. There are several ways to legitimately calculate interest rates and terms - APR, simple interest, rule of 78's, and others. All these methods have been used in the past and would be considered "legit". But this offer wasn't even close.

Here's what the trick was. The 4.5% interest rate was charged on the entire borrowed balance each year - even as the balance was being paid down each year.

Here's what that means. The department wanted to borrow $100,000 over 10 years. Each year, the balance would be paid down about $10,000. The interest payment each year should become smaller because the balance is lower each year.

Now, in this offer, the department was expected to pay $4,500 interest every year (the 4.5% rate on the $100,000 borrowed) EVEN THOUGH THE BALANCE WAS GETTING SMALLER EACH YEAR.

The result is the "true" effective rate of this offer was 7.28%, far above the other offers and the stated interest rate of 4.5%. This offer would have cost the department over $15,495 in wasted interest compared to the 2nd best offer of 5.00%.

In Summary
Sorry to say but don't stop your analysis of financing offers at the interest rate. Even legitimate interest rate calculations can provide a variety of costs. And sometimes, there are sharks out there providing totally bogus information.

Stay safe!

John R. Hill
Apparatus Budgeting Consultant
ENVIZION Financial
www.envizionfire.com