Or: How to get a free Toyota!
During the go‐go years of 2000 to 2007, the deceptive advertising of the prime mortgage industry was very bothersome. They used to have ads that touted the mortgage rate at something like 1.9% in large print and then the microscopic print said “..for the 1st two months and then we really sock it to you”. The problem is that it worked. That said, let’s logically examine how you can get a “free” Toyota.
Let’s put things in perspective. Back in that time, “the Banks” paid depositors up to 5% for CD’s. Now they pay about 1%, or 20% of what they used to pay. Toyota Motor Company is currently advertising 0% financing on new Toyotas for 5 years. That makes sense for them since the can borrow at very low rates and they can certainly pack the cost of financing into the price of the car. We all love “free”; free shipping, 2 for 1, no interest, et cetera; but usually, nothing is free, there is no free lunch.
Let’s look at the lending side of “the Banks”. They don’t make loans anymore unless you are a super good customer and are making them so much money they can’t afford to lose you, or the government guarantees the loan. Effectively, they don’t make loans.
Because Banks don’t make loans, there now exists a significant need for capital at reasonable rates. Yes, Bank financing for triple grade “A” borrowers with grade “A” properties is available for less than 6% if you have 3 CPA’s and 7 months to get a loan, but that leaves a lot of good people wanting. For the 1st time in 30 years or more, decent borrowers with good income properties are willing to pay prime plus 5% to get capital. Prime is now 3.25%, so that translates to about 8% which doesn’t sound like too much to borrowers these days, and it is a whopping yield for lenders.
Banking is not terribly difficult to understand. A bank pays depositors a low rate, loans it out at a high rate and keeps the difference. The world is evolving quickly and middlemen are being replaced all the time by computers, the internet and the access to information by the public. Since banks are not paying you anything, why not eliminate them? Yes, you lose the FDIC insurance, but you can mitigate that risk by making quality loans. It is not very difficult to assess the value of local collateral. You do it every time you purchase a house, you just have never called that “underwriting.”
Assuming you have a pile of money sitting in a CD or money market at 1%, and you can safely get 8% on a 1st TD on a local income property, you increase your yield by 700%. Given Toyotas 0% financing program for 5 years it takes the following amounts moved from the bank to a 5 year 1st TD to get a “free”:
Toyota Corolla $ 57,000
Toyota Avalon $ 100,000
Toyota Sequoia $ 186,000
Now isn’t that better than a free toaster?