A while ago (a very long while ago) a friend of mine sent me some numbers about Primerica’s SMART loan in a powerpoint format. At the time, I was having some serious problems on this blog, and was unable to follow through publishing this.
I’m not going to rehash it all here, but for a little history, you can visit this post for the back story.
Now, many months later, I can finally follow through on my promise.
Followers of this Primerica saga know that I had a SMART loan myself. I have an update to that little side story that I will post soon. But until then, the following is an article that Ken wrote last October or November to accompany the above slide presentation. And so now, without further ado: The SMART loan, broken down to all its nitty-gritty glory. The devil is indeed in the details. If you’ve been given a SMART loan proposal by a Primerica rep and you’re trying to figure it out. You’re going to want to read this and crunch your own numbers.
A SMART loan guest post
This is a SMART loan solution, one from October that I evaluated:
Pay close attention to a few things on the second page:
Subsequent payments $718.25 * 26 payments =18674.50 divided by 12 = 1556.21 (This is the true monthly outlay on this loan)
Now, go to any loan calculator on line…
Type in that loan amount $212,685.70 and tell the computer you want it paid off in 20 years at let’s say 6% (actually a pretty high rate for the timeframe this SMART loan came out.) What’s the required payment? $1523.75/month
At this point, you should be saying “Oh no, this can’t be true”
Next, look at the total projected timeframe the loan should be paid off on the SMART solution page: 22 years, 4 months.
Wait, The conventional loan will have a monthly savings of $30+/month and be paid off 2 years, 4 months sooner? Can’t be, the SMART loan is the best thing since sliced bread!!!
Let’s take this a step further. You see where it says subsequent payment $718? Look to the left. At closing, the client is required to pay $1436. Really, that should be taken off the balance on the conventional loan we just calculated because we’re borrowing that much less. Also, the loan costs on the 1st page includes more than $5600 in fees (Loan amount minus “debt included in proposal”). This is arguably $3000 more than a broker would charge. So in theory, the loan could be $4400 less if the client simply got a conventional loan.
Let’s type in a loan amount of $208,285 (212,685 – 4400 in extras)
Now the payment drops to $1492. So, the comparative payments from SMART loan vs. conventional loan is $64, again the loan is paid off 28 months sooner.
Let’s take it another step further, shall we? Let’s tell the conventional loan to be done in the same time frame as the SMART loan…22 years. The conventional loan payment is $1422. Oh my goodness, that’s over $100/month less than the SMART loan (and 2 months sooner to be paid off)
Hey, we like to talk numbers, right?
Let’s take that $100/month savings for 22 years at Primerica’s conservatively quoted 8% return. Using this calculator http://www.bankrate.com/calculators/savings/simple-savings-calculator.aspx you will see that this client could’ve saved over $71,000 by not being SMART.
Ok, now let’s see what happened to this client if they sell their home in 10 years. The SMART solution says they’s have a balance of $153,000 (Ending balance in 2018)
Let’s see what the amortization chart says for the 20 year loan ($208285 @ 6%)
See month 120 and notice a balance of $134,409, in a better equity position in 10 years by only $19,000.
In month 180 (15 years), SMART loan balance: $126,000, 20 year conventional $77,185 (Only $50,000 better).
So, there’s never one SINGLE MOMENT the SMART loan puts you in a better position. This is no surprise to full-time financial service professionals. We also know Primerica’s term insurance can cost upwards of 50% more than equally ranked companies that have been in business 3 times as long as Primerica. Not to mention, the insurance product lacks serious features, convertibility to permanent insurance just to name one. Also, the investments through Primerica charge the client nearly 5% before the money even hits the market. Invest $1000, $950 hits the market.
One final laugh…look who the “big bad bank” is that is being paid off in this proposal. Look under “Current Debt Listing” on the 1st page. This must be one of those banks that “wants everyone to be in debt forever”. Primerica, a division of Citigroup is only charging nearly $5,700 for this “gem” of a loan.