So my friend bought a used car at a cost of
Since he actually doesn’t have any money, a mutual aquaintenance agreed to purchase the car for him, spread the payments over 24 months, and for his troubles, added $50 per month for his financing fees.
So basically add $1,200 to the price for interest.
$4,864.65 divided by 24 = $202.69 per month + $50 per month for interest.
So he wrote 24 post-dated cheques in the amount of $253. each.
What interest rate is he paying?
Also, even if he pays the car off early, the agreement is the $1,200 financing charge stays no matter what.
Did he have alternatives? It’s easy to to claim usury, but if his options were worse or non existant, $50 for $202 a month may not be too bad. And the loaner is taking signifigant risk to someone who “actually doesn’t have any money”. I’m thinking he likely would not have gotten a loan from a bank (take note of the economy today), and thus would have no transportation to get a job. So, maybe it’s not a bad deal at all? Legitimate banks charge more than 25% for risk depending on their product. But percentages and dollar amounts are two different things. 25% on $200, although a large percentage, is small relative to the amount owed. 25% on $10,000 is another story.
So IMO, 25% for someone with no money on $4800 bucks is a good deal.
22.5% for someone who has no cash or down payment and wants/needs to make a $ 4800 purchase is not all that of line given the relative risk of purchasing a rapidly depreciating asset (ie a used car) for someone who has no credit or poor credit (or assumedly he could have financed the car himself) across 4 years of payments. There are credit cards that charge more interest than that.
The risk factors for a lender are extremely high in that scenario. He’s lucky he found someone to do it at all. If a “friend” with bad credit/no credit came to you would you loan him $ 4800? Most people would find excuses to say “no” even if they could afford it. Interest is usually relative to risk. Your no credit friend owns his financier a huge debt of gratitude beyond the interest he’s paying.
To be fair, the mutual friend that loaned him the money, was also able to get the car at mostly a wholesale cost rather than retail, so even though his interest is 22.5%, it is also offset by him saving the purchaser an additional $1,000 or so off the car. (which this person would not have been able to do himself due to his lack of connections.)
Of course he signed a private contract stating the terms of the deal and giving the lender the right to collect the car should he default on the payments.
Myself, I don’t think I would risk my $4,800 for all the obvious reasons.
I think it has the extreme likelihood of tunring into one of those ‘lose-lose’ situations. (the guy screws you, or there are bad feelings because he thinks you are screwing him)
I think for the person in a certain situation, this is a good deal.