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The World of Leasing Is Changing In a Hurry!

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We talked, last year about the downside of leasing for the vast majority of individuals. A lease is like renting a vehicle in that you’re paying for only three quarters or so of the price and at the end have an option, or residual, to buy the left-over balance out.

In credit and consumer tips jargon it’s called a fleece. At the end of the lease it is most likely that you will owe more than the vehicle is worth and will just need to walk away after having made all those payments.

For those people leasing an SUV or large truck, they did just dodge a big bullet – sort of.

With the high gas prices, resale values of SUVs dropped between 13 and 20 percent just between March and May, according to the largest vehicle wholesaler in the U.S.

So if own an SUV, the value has plummeted. At the end of the lease, the balance will be massively higher than the value of the vehicle and you’ll be walking away after all those payments.

And it’s getting worse, which is why GMAC just announced the end of last week they’ll no longer be offering any cool rate deals on leases in Canada, period. They just aren’t interested in promoting more leasing so they can take a huge bath three or four years from now – and that’s a real blessing, if the truth were known.

Why? When you drop back your vehicle, the manufacturer has to eat the loss and that’ll go on for years with all those leased vehicles out there. CNW Research estimates this year, the loss will be almost $5 billion, and more than $10 billion over the next few years.

But you also need two important heads-up:

If you’re returning a lease, there’ll be a lot more detailed inspection to see if they can get you to pay some repairs, etc. to avoid a bigger loss on the disposal. Please! Take some digital camera pictures of the lease you’re returning and do not turn over the keys without a written and signed inspection form from the dealer.

And: If you want some good deals and you absolutely have to finance, these lease returns have to be sold: So there’s already 2.9% or 3.9% finance deals on used 2 to 3 year old vehicles. Right now it’s already happening with BMW and Volkswagen, and they’re legit deals, since they can’t melt these lease return units down.

An E-mail From a Listener:

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I’ve freed up an extra $100 in my budget. Do I put it in RRSPs or against the house? Our family income is $90,000, we’re putting $600 into RRSPs, an extra $450 on the house right now.

The listener, let’s call him Greg, is in a 40% tax bracket and in his late 40s. What he didn’t put in his first e-mail is that he’s got a car payment of $250 for 2 more years, a snowmobile owing $2,000 and a boat at $3,000.

Becoming debt free is ALWAYS ahead of savings. In a leaky boat, fix the leak or all the bailing in the world won’t get you anywhere. Greg’s on track to be debt free in two years or so.

If he takes the $100 extra, stops the $600 RRSPs and diverts the $450 from the extra house payments, that’s $1150 a month. The debts get listed smallest to largest, then make minimum payments on all but the smallest debt. Does that make sense?

That pays off the snowmobile in two months. The $1150 and now the freed-up snowmobile money of $200 a month goes onto the boat. That’s now a $1350 payment and clears it off in two more months. Now the boat payment is gone and that $200 a month is added to the $1350, making it $1550 towards the car and it’s gone in three months.

Seven months from now, or February 09 he’s debt free but the house and has $1550 freed up. THAT is some serious money. Now we’re not talking about a spare $100, and $1550 now gets broken down into retirement savings and paid on the mortgage.

A half a step back has jumped Greg tons of steps forward, saved about $4,000 in interest and got him debt free a year and a half ahead of schedule.

A big section of the debt chapter in the It’s Your Money book walks you through this process very simply. Smallest debt to largest, minimum payments on all but the smallest and every one that’s paid off gets rolled into the next one.

Think of Greg in February when he’s got almost $1,600 a month going to pre-pay his mortgage or freed up that $20,000 a year into savings! Oh, and Greg got one more piece of advice: Never buy toys or cars again unless you can afford to pay cash for them.

What’s In Your Wallet?

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I hope by now you know my attitude towards credit card balances: Avoid them like the plague, because they’re a huge killer of your cash-flow and rob you from being able to put that money towards savings.

But I also know that stuff happens. And if you’re going to carry a credit card balance, here’s a new card promotion that just came out:

If you got a cool looking black envelope from Capital One, it’s worth digging out and looking through. Capital One has come out with a rate of 5.65% for a three-year term. After that, it’ll go to prime plus 0.9% and the card has no annual fees – that’s a BIG bonus!

As credit cards go, that’s about the best there is. Now it’s not for everyone, because they’ll be looking for an above-average credit score. I’m guessing 720 or higher. It’s not available on-line so you need to have the junk mailer or a reservation and access code if you are on the internet, or you can call their customer service 800 number and see if they’ll let you apply. On-line you’ll get an approval back in three to five seconds. It’s purely based on your credit score.

Customer Service number to call: 800 481 3239
Ask for the Prime plus 0.9% Platinum Card
If you’re on-line: go to: www.getmycard.ca and try using:
Reservation Number: 0010396010736445
Access code: 010603

Part of the reason for this great deal is that Capital One as well as MBNA and JP Morgan Chase aren’t part of the “big five no-service banks” and so they don’t have the access to millions of bank customers to market to. They have to get customers the hard way – one at a time. OK, other than JP Morgan Chase who handles the Sears Cards.

And one more thing: Don’t think Capital One is just a little player. They’re the ones with the endless commercials on U.S. channels: “What’s in your wallet.” And their CEO, Richard Fairbanks two years ago made – are you ready: $280 million in pay for a year.

Yes, there’s big money in credit cards. Unfortunately – it’s your money.

Rich Is Often an Illusion

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Ah, to be rich and famous. That’s what most people tend to think when we watch entertainers or sports celebrities. But be careful what you wish for, because so often that’s an illusion and an image, and nowhere near the reality of their lives.
Here are a few examples just from the last two weeks:

Serge Federov of the Washington Capital is being sued by Citizens Bank in Michigan for over $2.1 million dollars, claiming he defaulted on two loans.

Michael Vicks, the now jailed Atlanta Falcons quarterback, just filed for bankruptcy on over $50 million of debts versus $10 million of assets. It includes everything from a Royal Bank loan of $2.5 million (yes, I was wondering the same thing) to business loans backing a bunch of losers in everything from liquor stores to restaurants. And Vicks actually had a 10-year contract for more than $130 million before he self-destructed. At least he gets free room and board these days at Levinworth.

Mike Tyson earned over $200 million in his career and has been flat broke for years, even before his bankruptcy filing in 2003.

According to a story in Fortune magazine, singer Michael Jackson is hanging on by his fingernails because a hedge fund recently re-mortgaged his Neverland ranch for the umpteenth time. Supposedly, his equity in the Sony music publishing library has also been maxed out by borrowing against the equity some time ago. Yet over his lifetime, Jackson has earned more than $500 million and right now his debts way exceeds his assets.

Who cares? Well, for starters, it’s lesson number seven hundred plus of how dangerous it is for our kids to make these people our heroes and role-models. That poster of “whoever” in your kids’ room could well be the same person in handcuffs or bankruptcy court one day.

For us adults, it is another reminder that gross income is meaningless. Oh sure, more income should make our financial situation easier. But then, even two-thirds of lottery winners file for bankruptcy within 10 years. It is never about the income but about how much of the money you get to keep.

All these examples, and a ton more, are of people with an incredible gross income and it all slipped through their hands – and millions more after that. How much of what you’re spending is on credit or with borrowed money? How much of your spending is on image, a new car, the expensive vacation, the plasma TV or fancy restaurant?

If you can’t control your income, you can certainly control your expenses. Sometime today, just add up roughly how much interest you’re paying each month to make other people rich and ripping yourself off from keeping that huge amount of money going out the door each month. After all, knowledge is power and we cannot change what we do not acknowledge.

Federal Government Strengthens Mortgage Rules

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Late last week the Federal Finance Department announced some tightening of mortgage rules, hoping to avoid the risk of a U.S. type housing bubble.

The biggest one is that 40-year mortgages are out. That is, the 40-year mortgages no longer qualify for mortgage insurance when there is less than a 20% down payment.

Now don’t be thinking that’s really sad. We’ve talked about the financial risks of that length of time already. Reducing a $200,000 mortgage to 35-years increases the payments by $40, but saves almost $50,000 in interest. So it’s a good thing – but didn’t go far enough, in my opinion.

The second rule change is that there needs to be at least a 5% down payment. Fair enough – because someone with no money down is buying a nightmare and it’s often speculators who contributed in huge ways to the U.S. housing meltdown, thinking they could buy it and flip it, without ever sticking a dime into the house.

The third one is that not anyone can get a mortgage. There needs to be a minimum credit score. But NONE of the media stories had the score. It took me some time to dig it up out of the regulations.

It’s a minimum score of 620 to qualify. Now nobody needs to panic. 620 is not anyone who has decent credit. That starts around the 700 mark, but it’s a very low threshold to avoid a lot of the subprime mortgages that set off the U.S. market. And subprime mortgages have been growing at 50% in Canada. The score is too low but it’s a great start by the Government, even if it’s a ways too low.

Greetings from Kansas City

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While not all of these are related to credit and finance, here are a few fresh things from South of the border:

What’s with the ads for Canadian pricing on cars? Come on! I’d love to take some of these manufacturers down here and compare the EXACT models that we have in Canada…then explain to me what “Canadian pricing” is. Small wonder we’re now importing upwards of 200,000 cars into Canada.

Utility companies are light years ahead of us down here. There is something you can install called a time of use meter. You have to know that power has different values and pricing at different times of the day. Using air conditioning when the whole planet wants it, is more expensive than the middle of the night when demand is at its lowest. So these meters track when power is used and bills accordingly. Talk about having a huge impact on your utility bill!

Want to get a pair of prescription eyeglasses for $25? There’s a web site called zennioptical.com. You fill in your proper prescription from your optometrist and three weeks later you’ve got a great pair of eyeglasses direct from China! Even the Costcos of the world can’t match that. Not sure if they’ll ship to Canada but I’m going to be checking. I’ve seen them – they’re great!

When will Canadian cell phone companies stop ripping us off, compared to the U.S.? There can’t be anyone left in this country who pays long distance charges as almost all carriers have unlimited long distance plans. At most, it’s $50 a month and one even has a family plan for 4 phones – all unlimited – for $100! And we’re still stuck signing three year contracts and paying a fortune? Good thing Virgin Phones is now in Canada – hope that helps.

With the huge gas prices, according to the Americans’ standards, Chrysler now has a marketing gimmick: For 12,000 miles, they’ll let you have gas at $2.99 a gallon. Sounds great, but you always have to compare what you’re getting with what you’re giving up. Like taking that 2.9% financing but now it’s costing you a $2,000 rebate, for example. In this case, instead of the cash rebate, they’ll cover the difference in the gas price. But when you do the math – you might be getting cheaper gas but it’d have to go to over $6 a gallon to be better than taking the cash rebate! Good marketing gimmick and lots of people are taking it – but it’s totally tripping over a nickel to pick up a penny!

Buying Gas At 20 Cents a Gallon On Your Credit Card

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Yes, you can get a 95 percent discount on the high price of gas just by using your credit card… sort of.

The vast majority of people are buried in credit card debt and monthly payments that make every lender rich, leave nothing for savings, and have the average family working most of the month just to pay bills. That’s surviving and not thriving, and it’s a horrible way to go through life.

As a result, every small increase in food prices, the cost of a gallon of gas, or any price increases become very painful. And what do most of us do right now? We charge our gas on credit cards.

The good news, next month we only have to pay around a five percent payment on our ballooning balances. So really, that $50 fill up hasn’t cost us anything when we charge it on our credit card since we’re not parting with any actual money at the time. Then, next month, when the credit card statement arrives, millions of people can only afford the minimum payment. That three to five percent payment puts $2.50 towards that fill up, tops. OK, it puts nothing towards it since almost the whole payment is getting sucked up by interest charges, but you understand the sick logic and financial nightmare so many people find themselves in.

Making minimum payments buys us the right to use the card for another month. Nothing more. It’s treading water and making a huge number of card issuers very very rich.

One of the most dangerous things we do in our financial lives is to charge consumable items to our credit cards. The restaurant charges, groceries and gas are used up and consumed way before the credit card statement even arrives! In other words – we have nothing to show for all those charges and that huge balance.

Could you set yourself a credit limit below which you won’t use your credit card? Can you decide to pay by cash or debit card for anything you’ll use up before the week is up? You’d be amazed at how quickly your debts will turn around when you no longer have those ten or twenty charges on your card, because they were paid in cash. Your statement will start looking weird with some payments on it, but very few new charges.

The price increases of gas and food impact us so heavily, and hits us so hard, because most of our money is already spent way before the next month even starts. In the big picture, if we were debt free, would we really notice that a fill up costs another $8 or $10? No, because most of our pay would be staying in our accounts! THAT is debt freedom. Until then, it hurts disproportionately, because we just don’t have that $8 or $10 left right now.

Right now, credit card companies have millions of families exactly were they want them: Carrying huge balances and no hope of paying much more than minimum payments. What’s in your wallet? A financial nightmare, waiting to explode – sooner or later. Or changing around that old American Express ad: Don’t leave home with it!

Is There A Problem Here?

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Last week, the Royal Bank released their annual survey of Canadians’ spending and savings habits. Now, any survey gets huge media coverage. In most of the major newspapers across the country it was a full five column story whereas I can’t get one column talking about the insights into credit and debt. But more complaining in a minute.

The survey shows that our savings are dropping and our debt is growing. Yes, it’s all backwards. 83% of us worry that we don’t have enough savings and even more than that say they can’t save as much as they would like. Less than half of us have any emergency savings and under 25% have three month’s worth of savings – and that has to be a minimum rainy day fund! Here’s what I’ve been saying for years and now there’s an actual stat: 67% of us think of our credit cards and line of credit as our emergency fund!

Now onto the whining part: Is it just me or is there some huge conflict here? The survey by Ipsos Reid was sponsored by a bank. Banks are in the business of lending money. That is where they make a profit. When we borrow and go broke – they get rich. When we save money – they pay US interest and on their financial statements, that’s a bad thing!

So am I right to be suspicious that banks are preaching savings while all their ads focus on selling their credit cards and debt? Their Sr. VP of Banking was quoted all over the story that us Canadians should save more, rely less on credit and be ready for financial emergencies. You bet, it’s totally right. But does that mean he will change the whole focus of the bank away from debt and onto marketing savings, lowering service charges and expense ratios on their mutual funds, make GIC easier to obtain and stop charging service charges on savings accounts? I’m thinking not! For me, actions always speak louder than words.

If I’m too harsh or out to lunch – I’m two clicks away from sending me a note, because my purpose and passion is not to be right but to make you think!

Say It Ain’t So!

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One of the worst imports we’ve got from the U.S. is the recently marketed 40-year mortgages. But according to the last RBC Homeowner Survey, almost half of all first-time homebuyers are taking this term!

Here’s the bottom line: It’s purchasing a dream home and making it into a financial prison.

Let’s look at the implications for a minute: Just a relatively small $250,000 mortgage over 40-years stretches the payments by another 15 years and drops them only $235. That might seem like a good idea until you do the math, because this small amount of breathing room each month comes with a very high cost of over $177,000 in extra interest.

On this $250,000 mortgage, the total you’d be paying back is $660,000. Now remember that this is net income you use to pay your bills. So in a tax bracket of around 30% you’d need to earn just under one million dollars just to pay off this mortgage. And after ten long years of payments, you’ve barely paid off $20,000 of principal!

Oh – and if you’re past your 20s, a 40-year mortgage likely means you’ll die never having paid it off and having made payments for an entire lifetime. THAT is not a recipe for financial success.

We do whatever it takes to get that home and stop thinking, planning and being realistic about the debt we’re taking on. And I guarantee almost everyone who needs to take a 40 year mortgage won’t be saving anything for retirement or an emergency. Every new homeowner also needs the money for the tax adjustment, legal bill, interest adjustment, buying a lawn mower and the basic homeowner stuff and that $5,000 or $6,000 goes on a credit card or line of credit and immediately forces another $200 payment.

Instead:
-purchase a home for a lower selling price
-pay off one of your current bills to get your budget in line
-save a little longer, harder and more to increase your down payment by another 5%
-will your parents help out? NOT with a loan – that’s just making something bad – worse but with a gift of some down-payment to help you not kill yourself with payments and debt?
As with any borrowing: Just because you can – doesn’t mean you should!