Lesson 22 of 25 · 7 min
Two tiers, one principal, the extra interest
Ten points of rate is a different interest total, not a different capacity against the car.
Ten points of rate is not ten points of capacity. Lesson 21 produced $7,371.14 of extra interest between 4.99 percent and 14.99 percent on $24,980 over 60 months. That $7,371.14 is time. Capacity is loan against mark. Track 5 lesson 12 is the securities-backed version of the split. This lesson holds the two figures next to each other so they cannot be added.
Same $24,980, 60 months. At 4.99 percent the installment is $471.29 and LTV on a $24,980 car with $0 down is 100 percent of cash price. At 14.99 percent the installment is $594.14 and LTV on day one is still 100 percent of cash price. The rate did not change the numerator as a share of the car. It changed the cash that leaves the account and the interest that accrues on the way.
A capacity change of ten points would be a different object. If the car is $24,980 and the loan falls from $24,980 to $22,482, LTV falls from 100 percent to 90 percent — ten points of capacity. That is a $2,498 movement in principal. Ten points of rate, on this book, moved $7,371.14 of interest and $0 of principal. The two tens are not convertible.
People add them because both are 'worse by ten.' One is a carrying cost. One is a claim against the asset. Lesson 4 already separated life-of-loan interest from capacity. Lesson 21 supplied the four-tier table. This lesson is the refusal to add a rate gap to an LTV gap.
A point of rate is a year-cost on a shrinking balance. A point of LTV is a share of the car. They share a word. They do not share a unit.
Key terms
- Rate gap
- The difference between two posted APRs. It produces extra interest, not extra principal.
- Capacity gap
- The difference between two LTVs. It is a change in how much of the asset the loan represents.
- Unconvertible tens
- Ten points of rate and ten points of LTV. Same number, different machines, not additive.
Worked example
The same ten, two units
Tallow Yard Autos. Principal $24,980, 60 months. Compare a 10-point rate gap with a 10-point LTV gap.
- 4.99% interest
- $3,297.34
- 14.99% interest
- $10,668.48
- Extra interest from ten points of rate
- $7,371.14
- Day-one LTV at either rate, $0 down
- 100%
- A 10-point capacity change on this car
- $2,498 of principal
The rate is not in the ratio.
100% LTV to 90% LTV.
Ten points of rate cost $7,371.14 of interest. Ten points of capacity is $2,498 of principal. Adding them is adding minutes to kilograms.
Check yourself
On $24,980 over 60 months, 4.99 percent versus 14.99 percent produces $7,371.14 of extra interest. If the car is $24,980, how much principal would have to move to change LTV by ten points, and is that the same $7,371.14?
Ten points of rate is not ten points of capacity. Track 5 lesson 12 is the securities-backed version of that split. Open A rate change is not a capacity change →
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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.