Lesson 15 of 25 · 6 min
Add-on products financed into the principal
Products packed into the principal raise the claim against an unchanged car, which is a larger loan on the same collateral.
Add-on products financed into the principal, extra contracts packed onto the loan, raise P against an unchanged car. Lesson 7 showed a down payment shrinking P. This lesson is the other direction. The car is still the collateral. The claim is larger by every product that was rolled into the balance.
Tallow Yard Autos sells a car for $27,460. Add-ons: extended coverage $2,180, GAP $895, paint $695, theft etching $420, totalling $4,190. Down payment $1,800. The car alone would have financed $27,460 − $1,800 = $25,660. With add-ons the principal is $25,660 + $4,190 = $29,850. At an illustrative 8.1 percent for 72 months, the extra installment versus financing the car alone is $73.67.
Extra paid over the life is $5,304.17, of which $4,190 is the products and $1,114.17 is interest on them. The products are not a feature of the car's mark. They do not raise the denominator of LTV. They raise the numerator. Track 1 lesson 3 reads that as a larger loan on unchanged collateral: lending value is a discounted asset, and drawing more against it raises the claim while the asset sits still.
GAP, the product that pays a named shortfall after a total loss, is the next lesson. This one is only the financing. Four contracts, $4,190 of principal, $1,114.17 of interest on that principal, same $27,460 car.
An add-on financed into the loan is a draw. The car does not become more valuable because more was drawn against it.
Key terms
- Add-on product
- A contract sold with the car — coverage, etching, paint — that can be written into the principal.
- Financed add-on
- An add-on whose price is added to P, so it is paid, with interest, over the term.
- Unchanged collateral
- The car's mark, which does not rise when extra products are packed onto the loan.
Worked example
Four products, one larger numerator
Tallow Yard Autos. Car $27,460. Add-ons $2,180 + $895 + $695 + $420 = $4,190. Down $1,800. Illustrative 8.1 percent, 72 months.
- Car-only principal
- $25,660
- Principal with add-ons
- $29,850
- Extra installment
- $73.67
- Extra paid over the life
- $5,304.17
- Of which the products
- $4,190
- Of which interest on the products
- $1,114.17
$27,460 − $1,800.
$25,660 + $4,190.
The car is $27,460. The loan is $29,850. The $4,190 of products raised the claim and left the collateral where it was.
Check yourself
Car $22,140, add-ons $3,180, down $1,500. Illustrative 7.5 percent, 60 months. What is the extra monthly installment versus financing the car alone, and the extra over the life?
Financing an add-on into the principal is the everyday version of drawing a line to spend: the balance rises against the same asset, as Track 1 lesson 3 would read as a larger loan on unchanged collateral. Open Advance rate versus market value →
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Educational only. Nothing in this lesson is investment, legal or tax advice, or a recommendation to enter into any transaction. Figures are illustrative and computed from the inputs stated in the lesson.