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Irrational American Finance

Only three years ago, America was exporting AAA rated sub-prime garbage debt. If you're wondering whether the financially catastrophic consequences that followed made us more rational going forward, take a look at this General Motors story and you be the judge. It's the story of how GM paid me two grand to borrow money for nothing. It's the story of how I got a loan that was too good to be true and how acting financially responsible made my credit rating drop.

The story of free money
A few months ago, my wife and I bought a new car. Based partially on a CBS MoneyWatch review from my colleague, Jerry Edgerton, we bought a GMC Terrain. It was good advice, because we happen to love this all-wheel drive fuel efficient vehicle. This story, however, is about how we paid for it.

After I negotiated the best deal I could, using both a loyalty rebate and a USAA rebate, I asked if I would save anything further by paying cash. After all, car loans are not tax-deductible and the best I can earn on my cash is 2.4 percent at Ally Bank. The answer shocked me.

The dealership responded that I wouldn't save a dime. Our salesman did note, however, that we could receive $2,000 by financing the car through GM. He added that, if I qualified, I could finance the whole enchilada for 36 months at absolutely no interest. In my experience, something that looks too good to be true usually is. This wasn't. The only way to get this rebate was to take the financing deal.

So for closing costs of minus two grand, I borrowed money with no interest. I didn't need to run this through my calculator to know they lent me money at a negative infinity interest rate, using the APR calculations from the Fed's Truth in Lending Law.

Who would be making this loan to me? It turns out it was Ally Financial, a sister company to Ally Bank where I already had my cash stashed. Ally Bank, by the way, was once owned by General Motors and was called GMAC Bank. Both Ally and GM were bailed out by the US Treasury.

Why they paid me two grand to borrow money for nothing
I was pretty sure Ally wasn't going to make any money on my no interest loan, particularly since they were paying me 2.40 percent on that same cash. So I followed up with GM and Ally to see what their master strategy was.

GM spokesperson, Ryndee Carney, looked into the matter for me to make sure I correctly understood the offer presented when we bought the car. She confirmed that the only way I could have snagged this two grand rebate was to borrow the money for nothing. I noted that GM had a positive cost of capital and asked why they would have given me the deal. I stated that though I could understand a subsidized loan or a cash rebate to sell more cars, giving me this gift seemed a tad uneconomic.

Carney would only say that incentives are part of the business of selling cars, but wouldn't comment on this specific incentive saying competitors would love to know GM's incentive strategies. However, she was happy to hear that we loved our GMC Terrain.

Next, I spoke to Sue Mallino, of Ally Financial. She noted that manufacturers often offer cash discounts or subsidized financing, and occasionally both, as in my case. Mallino did state that it was safe to assume that GM compensated Ally Financial to make the loan to me with no interest.

Punished for acting fiscally responsible
I happen to think I'm acting in a way the US Government isn't - fiscally responsible. It would have been irresponsible to turn down this free money and pay an extra two grand for the Terrain. Yet, three months later, I noticed my formerly stable FICO score had dropped about 20 points. Apparently, the folks at Fair Isaac Corporation would have considered me more financially sound if I just paid the extra two grand and turned down the free loan.

In reality, I'm not in the least bit surprised my FICO score dropped since Fair Isaac Corp (FICO) can't invest the time to research why everyone took out a new loan. Barry Paperno, Consumer Operations Manager for myFICO.com, who explained that they have found a statistical correlation between a consumer opening up new credit accounts and future increased risk of default. Paperno predicted that my FICO score would likely recover in 6 - 12 months if we continued our pattern of on time payments.

My take
Companies act irrationally all of the time, so exploit these irrationalities when you can. Don't let how others might view you stand in the way of you acting fiscally responsible, even if those others are credit rating agencies. Though this loan ended up hurting my FICO score, it's only a short-term blip. Better a dip in my credit score than letting someone else make me act irrationally.

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