When 1.9% is Really 7.9%
One of the things I love about my work is I never know what challenges I might get during a "normal" work day. Much like Ted Hanks’ character, Chuck Noland, in the movie CastAway, one never knows what the tide might bring in. Last week I got an email from a client who decided to install solar power and he emailed outlining several payment options. One option was 1.9% financing for 10 years. Given that Treasury bills pay over 5%, that seemed like an attractive option.
I emailed him to make sure there wasn’t any fine print in that offer. The next day he emailed that the financing wasn’t so simple after all. There was a $3,000 “origination fee” added to the loan balance and there was a provision requiring the purchaser to pay the solar company the full amount of the tax credit within 18 months of purchase. Calculating the actual interest rate required computing the IRR of unequal cash flows, something that was right up the alley of our new financial planner Nick Ross. It turned out the actual interest rate was 7.9%.
Our client has ample cash reserves, so we suggested simply paying cash for the solar installation. Personal finance questions come in all shapes and sizes. And as this example illustrates, we excel at helping successful people make smart decisions about money.