Capitalized Cost Reduction

  

This...is a down payment.

It’s called a capitalized cost reduction because someone paid a lawyer $350 per hour to confuse people when they look at legal contracts. Now, guys in ties who work at auto dealerships and mortgage branches tell women at bars that “In the biz, we call them ‘capitalized cost reductions.’”

You know that guy. His name is Gary, and he’s shooting hard for middle management.

So yeah...a capitalized cost reduction is pretty much just a down payment, a cash sum when buying a home or trading in a used car when buying a new one. You can argue that the definition counts if you’re using rebates to buy a durable good, or even signing a longer lease to get a lower rent.

This is how you lower financing and principal payments. Pay more money up front...pay less in financing or a lower lease price on a car or home.

Now go tell Gary to refill the coffee pot.

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finance a la shmoop- what is compounding value or compounding interest? ah the

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power of compounding. it makes trees stronger pollution more feral and the

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rich well richer. how so well let's start with compounds kissing

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cousin with six toes, arithmetic compounding. right so the first was [feet with six toes pictured]

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really geometric compounding now we're talking about arithmetic compounding. if

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you invest a thousand bucks in a ten-year bond that pays 6% of a year in

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interest, the dough comes back to you in a pattern that looks like this - like

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every six months they pay thirty bucks and it's $60 a year, got it? nice. you get

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the total of sixteen hundred bucks back from your investment and the cash that

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came back to you you know came in small parts all along the way, until you got [list of yearly returns]

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about two thirds of it or sixty percent at the end right? if you just spent that

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money and collected your thousand bucks at the end that's it. okay so that's

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arithmetic compounding/ the money comes to you if you don't reinvest it.

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ding-ding-ding that's the key here and you just go buy burgers. okay so now

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let's look at what six percent compounded looks like over the same

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10-year period .well at the end of year one it's a thousand sixty bucks and note

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we're only gonna compound it annually we probably should do the semi-annually but [list of yearly compounds]

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we'd confuse you even more so don't do that. but then you essentially reinvest

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that money and you get another six percent compounded on that thousand

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sixty , instead of six percent compounded against the original thousand. so by the

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end of year two you'll have a thousand one hundred twenty three sixty. and by

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the end of year ten you'll have one thousand seven hundred and ninety

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dollars and eighty-five cents. so why do you make so much more money when you

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compound interest versus getting 30 bucks twice a year like you would in

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this bond example? go and find burgers with it? yeah .you don't want to do that

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well essentially what's happening is that you're delaying your gratification [man in a drive through window]

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of getting that sweet sweet cash or getting liquid whatever you want to call

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it. by reinvesting your gains year after year after year. so do you have that sort

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of self-control? do you need the cash yeah that's the question if you for

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example have trouble making it home from your local pizza spot with the pie

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in tact well then compound interest keeping the discipline to not spend the [man eats pizza while driving]

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you. sorry

Up Next

Finance: What is recapitalization?
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What is recapitalization? Pay attention the first time, there won't be a recap.

Find other enlightening terms in Shmoop Finance Genius Bar(f)