Thursday, October 30, 2014

How people who can't do math get shafted.

I have a car (an Accord, if you must know) that is 17 months old.  When I bought the car, the dealer offered me a car loan at 0 percent interest for 36 months, so I took it.  Even in the world of very low discount rates, accepting the loan allowed me to get a further small effective discount on the car.

The dealer called me today, saying I could trade the car in for a new car and not increase my payment; the payment would simply reset for 36 months.  I told him I needed to do a little math before calling him back.  The math I did was as follows:

Value of Old Car from Kelly Blue Book + PV of 36 months of payments = Cost of New Car.

Cost of New Car - Edmunds Value of New Car = $6000.

Yes, the dealer was trying to fool me into paying $6000 for...nothing.   In my particular case, he could not profit from informational asymmetry.  But for the person with the average math skills in the US?  That might be a different story.  We know this selling tactic must work sometimes, because otherwise I would not have gotten the call.

The first lesson from all this is we really need to do a better job teaching math.

The second lesson is that, in the meantime, we need to protect consumers from these sorts of practices.