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Finance tip: Motoring finance
Watch out for balloon payments. With the worst of the recession seeming to be over, the car companies are starting to push their marketing hard again. With this, comes the odd fantastic offer where you can get a brand-new whatever for some amazingly low monthly repayment. While it’s still highly debatable whether you should be buying a new car, lots of people do so, often lured solely by the low repayments on offer. What they haven’t seen (or bothered paying attention to) is the massive chunk of cash that must be paid at the end of the financing period (generally 60 months, but sometimes as long as 72). This is the balloon payment.
Knowing that most people only look at the monthly repayment as their sole affordability criterion, the financing company (tied to the car company) wants to keep this as low as possible. They do this by having the customer pay a substantial balloon payment at the end of the financing term – this reduces the monthly repayment, as the customer is then only really paying off the total value less the balloon payment (with a common deposit of 10%, and balloon payment of 40%, you’re only ever paying off half the car). What this means is that you, as the buyer, diligently pay your dues every month, feeling that you own the car. You never really do own the car, though, and as the financing period winds up, the real owner of the car – the financing company – demands its balloon payment if you want to keep it (and actually become the outright owner). Very few people are in the position to cough up such a substantial chunk of money, and have no option but to hand the vehicle back to settle the difference. Thus, after five years of paying conscientiously, you land up with sweet nothing. Maybe, if you’re lucky, you may get a little extra back over and above what you owe, but they will often just convince you to use that as the deposit on a newer model – sucking you back into the same cycle, where you never actually own your own vehicle. So, how do you avoid this? Look at the structure of the financing deal carefully, and be sure to find out if there is a balloon payment, and how big it is. Assuming you want to own your car after five years, and want to reduce the size of this financial shock, offer to pay a bigger deposit, and to raise your monthly repayments slightly. This will reduce, and maybe even eliminate completely, the balloon payment waiting to hit you down the line…
Business tip: Strategy/Monitoring
Know your early warning signs. Many business owners and managers are too busy working ‘in’ their businesses to take the time to do consistent monitoring of every aspect of their business. When a major crisis or disaster hits, though (like a cash-flow crunch, or the loss of a major customer), they simply cry into their beers and claim they could never have seen it coming. Being able to identify early warning signs is an essential tool or skill to avoid having to deal with a disaster, and could save your business from tanking completely. Take Van Halen (the band), for instance. They had a clause in their contract that, for all performances, they had to have a big bowl of M&M’s backstage, with all of the brown ones removed. Most saw this as the ultimate diva behaviour, and battled to understand such a ridiculous request. What it was in reality, though, was a brilliantly simple test of whether all the other requirements of the contract were going to be adhered by. They had, for example, very specific requirements for their sound rigging, which had been laid out very clearly. It would have taken them ages to personally check every connection point and amp at every concert, but it was obviously massively important that it was done right. If they found brown M&Ms in the bowl, though, they knew that there was a strong likelihood of other requirements not being met, and would then have to take the time to double-check all the equipment. The M&Ms, then, acted as their operations early warning sign. What are the early warning signs in your business, that could indicate more digging is required? Is your days inventory growing every month? Are your debtors taking longer and longer to pay you? Are you getting more customer complaints filled out on your comment cards? Whatever they may be, identify your particular early warning signs, and watch them like a hawk…
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