Fixated on Gas Prices
A guilty pleasure movie favorite of mine is “Trading Places.” The social experiment of lifting one man up while kicking another to the ground is great fodder for comedy and offers a perfect analogy for this blog post.
What makes “Trading Places” such a good movie is that in the end, both Louis and Billy Ray end up winning. Even Louis, who loses everything he has at the beginning of the movie, ends up on a yacht exchanging air kisses with Jamie Lee Curtis.
The idea that nature has to be in constant balance is an interesting concept. People are constantly waiting for the other shoe to drop, or worried about payback, or thinking that karma owes them a break. I don’t know whether this is true or not, but I do know enough not to risk incurring the wrath of karma or anyone else that can bring misery to my life.
It was with “Trading Places” in mind that an idea popped into my head. Why can’t a car payment be tied to gas prices? If gas prices go up, why can’t a car loan payment be lowered to offset the rising expense? I did some basic math and here’s what I came up with:
If I have a car with a 15-gallon gas tank and gas prices are $3.70 per gallon, it costs me $55.50 to fill up my car. If the price of gas goes up to $4 per gallon, filling up my car would jump to $60. If I fill up my car twice per week, that’s $9 per week, or $36 per month, in extra fuel costs.
In this hypothetical scenario, let’s say I have a $20,000 car loan for a term of six years at an interest rate of 10%. According to Bankrate.com, my monthly payment is $370.52. Now, to offset the extra $36 I am spending in gas, my lender would graciously lower my interest rate to about 6.5% for that month. That would save me about $35 in interest payments.
The Department of Energy tracks gas prices, which offers a benchmark for lenders to use. According to that benchmark, gas prices are more than 40% higher today than they were a year ago. Even if the economy is improving, consumers are spending significantly more on gas now than they were last year. Dating back to 1990, the average monthly change in gas prices is 0.43%. That equates to $3.75 per gallon being risen to $3.77. A minimal reduction in interest rate for a significant marketing impact.
Worried about losing money if gas prices shoot through the roof? Lenders would be able to hedge against this product by investing in oil prices. Like adjustable-rate mortgages, lenders could also place caps and ceilings to keep the costs from escalating to unreasonable levels. I also think that lenders could increase the interest rate on car loans if gas prices fall.
Think of the press coverage that could be gained by introducing such a product. Remember when Hyundai announced its program that allowed car-buyers to return vehicles if they lost their jobs? At the time, it was a huge deal. This could offer a similar PR boost. Credit card companies offer cash rebates for using their products to buy merchandise. Lenders could tag this product as a gas rebate for their customers.
Ultimately, this would create a balanced expense for consumers every month. They would know that the cost of their car payment and the cost of gas would never exceed a certain amount. This would take away all of the fear and anger that comes when gas prices start rising (especially at this time of year) and replace it with the certainty of a fixed payment. Doesn’t everybody win?
