To finance or not to finance ...

[rngrrymd]

I finance the entire purchase price at an interest rate of 5% over a 5 year period, I can buy my tractor now, but at the end of 5 years, I will have PAID: $33,968.22

So, it will have COST me $3,968.22 in interest.

It seems the true cost, therefore, of buying a tractor now instead of waiting 5 years, and then buying it, is $3,968.22 + $5,799.00 = $9,767.22!

Long-term average inflation rate is 3.22% $30,000 tractor today will cost $35151 in 5 years based on the average. Savings of $1,183 financing tractor now.
US Inflation Long Term Average

Let's use 3% average instead --- $30,000 tractor today will cost $34778 in 5 years based on 3% inflation. Savings of $810 financing tractor now

Using the inflationdata.com link above the calculator shows from Aug 2013 to Aug 2018 a $30k tractor in 2013 is now $32343.41 today - Loss of $1624 financing tractor now

$4929 investment earnings (tax removed) - $1183 saved by financing now = $3746 / 60 months = $62.43 cost per month.
$4929 investment earnings (tax removed) - $810 saved by financing now = $4119 / 60 months = $68.65 cost per month.
$4929 investment earnings (tax removed) + $1624 loss by financing now = $6553 / 60 months = $109.22 cost per month

There is no scenario where you lose $9767.22. Rather than going without a tractor, where else can money be saved?

How much does one spend per day on 1. Coffee? 2. Eating out? 3. Cigarettes/Alcohol? that can be cut back/eliminated for cost savings? For $62.43 to $109.22 per month?

If it takes me 12 hours a week to do chores by hand and 4 hours with tractor what do I do with the extra time? Get a 2nd job and invest that money? Go fishing? Enjoy my kids/spouse/time with friends? Contribute my time to a charity helping others?

If I live in a tent and save money for 30 years can I buy a house? If I walk to work every day can I save money to buy a car? Do I want to?

If I already have the $30k, then I agree, if you can get the finance rate at lower than what you can make off of investing, it makes economic sense. However, for the sake of argument here, I'm looking at assuming starting from zero savings. So, each month, I'm saving $500 towards the purchase price, and investing that money........I guess the point is, you can play around with the numbers and it will shift them in favor one way or the other. But when it comes down to it, special cases such as Jeff's aside, if it's financed, you are going to lose money over paying cash. It's just a question of how much. For my case, I am amazed by how much that money really turns out to be.

Is this a disingenuous thread where the OP didn't want advice but wanted to point out how much money we who finance "lose"? Is the scenario valid in the real world? Does anyone who has $0 in savings plan on putting away $500 a month in investments or financing a tractor for $566.14 per month? Does anyone who has $0 in savings make enough money for either investing or tractor payments after they pay for housing, car, food, utilities, etc unless they live in a tent and walk to work in which case they probably don't own land to use a tractor on anyways? Just saying....

I say invest the money for 5 years and one can always come to TBN and watch "tractor ****" aka everyone else's pictures of their tractors. :laughing::laughing:

 

[RayfromTX]

If you are going to justify financing a purchase, I would say that your home is the easiest to justify. The tractor would be the second easiest to justify. Your vehicle and everything else comes further down the list. Tools matter.

How many years do you have left to enjoy this purchase? How many happy weekends will you spend on your tractor that you would otherwise spend money in other less productive ways?

 

[kenmac]

Kubota dealer told me cash price for my z turn was the same as if I were to finance through kubota @ 0%.
Then, he told me there would be around $300.00 to do the paperwork. He said this wasn't him, it was kubota and if I didn't pay the $300.00 he would have to.

Maybe 0% on a tractor is true 0% with no added fees like on the diesel Z turn mower

Guess they had it figured out that $300.00 is what they would lose by financing @0% so they were going to get their money up front !

I paid cash to save the $300.00

 

[Tractor Seabee]

0% is simply a tactic to appear as borrowed money cost you nothing. An absolute fairytale. Proof? The price of the tractor will be more financing at "0" or if it stays the same, they are insuring that they are paying the financial companies with the residual with a high enough mark up. In other words you are not getting 15-18% off a tractor plus 0% unless the list for the tractor has been elevated as they do at some car dealerships.

You have to look at the $0 down $0 interest two ways. Is the tractor same book price either way or is there a cash discount. When I bought my BX I asked that question. Same price either way so the interest was not hidden in the total price anyway. It is a way to increase sales to meet the manufacturing cost targets and profit targets. Then look at what alternate financing costn vs dealer financing. Other deals may be different. Look at it both ways to reach a decision. I agree with the others that you do not finance (with a financing cost) for something that is a play toy. Due to the manufacturer financing deals on SCUTS and CUTS today, the value of used has diminished greatly plus there is a premium cost to trying to finance used, even if you can find a lender. Used is normally a cash deal. Why pull an investment to buy for cash when you can buy new with no finance cost.

Ron

 

[4570Man]

0% is simply a tactic to appear as borrowed money cost you nothing. An absolute fairytale. Proof? The price of the tractor will be more financing at "0" or if it stays the same, they are insuring that they are paying the financial companies with the residual with a high enough mark up. In other words you are not getting 15-18% off a tractor plus 0% unless the list for the tractor has been elevated as they do at some car dealerships.

I agree but sometimes they won’t come off the inflated price for cash which leaves very little reason to pay in full. In other cases like the one 2 post above mine the difference is very little and you’d make more than the difference back by investing your money. My buddy bought a Ferris 2100 and said the cash price was $200 less than financing for 5 years. He said it would cost a lot more than $200 to use his money and I agree with the logic. On top of that even adjusted for the mowing season being less than 12 months his payment is less than what a yard crew would charge.

 

[coobie]

A couple of follow-up comments:

1) As a few (and surprisingly only a few) have mentioned. There is no such thing as 0%. The cash price should be (and my understanding is that it is - maybe I'm wrong?) always lower than the 0% financed price. If a dealer tried to tell me otherwise, I would walk.

2) If I already have the $30k, then I agree, if you can get the finance rate at lower than what you can make off of investing, it makes economic sense. However, for the sake of argument here, I'm looking at assuming starting from zero savings. So, each month, I'm saving $500 towards the purchase price, and investing that money.

3) There is no guarantee of stock market returns. 10% is the historical average of the S&P500. Average inflation is 3%. This is factored into the consideration by calculating returns based on a net 7% gain. Over the last 5 years, however, my retirement savings have averaged 15-20%/year (index funds). At that rate the difference would be huge. As to Jeff's point - yes, I'm wondering too when this Bull run is going to end. Probably sooner rather than later.

I ignored management fees, because on a Vanguard S&P500 index funds, the management fees are 0.14% (negligible). The comments about taxes were (kind of) correct. Capital gain tax rates are 15% (not 20%) unless you make over about $500k/yr. If I did, I wouldn't be having this discussion. So, subtract 15% off the investment savings.

4) The question of the tractor appreciating in price sounds like salesman speak to me. A used tractor may appreciate at about 3%/year (inflation) and the cost of the tractor will go up about 3%/year (inflation). But again, that is factored into my calculations by subtracting that out of the returns on my investment. (i.e. I assume I lose 3% each year to inflation, so my net return is 7%, not 10%). If someone can point me to concrete examples of a tractor selling for 3%/year more than the purchase price, please do. That seems like a worthwhile brand to consider. My admittedly limited perusing seems to be that you can often (on average) sell a JD or Kubota for what you paid for it, but to sell it for more at a rate of 3% seems questionable?

5) As Jeff pointed out, I can see some special cases where paying cash may incur a large tax burden that would outweigh the finance costs.

I guess the point is, you can play around with the numbers and it will shift them in favor one way or the other. But when it comes down to it, special cases such as Jeff's aside, if it's financed, you are going to lose money over paying cash. It's just a question of how much. For my case, I am amazed by how much that money really turns out to be.

Arrow - I think you get at the crux of the question. "What do you need more at this point in your life?"

Why ask anymore questions?You seem to have figured this out.

 

[the old grind]

Not sure why is financing so often (over)discussed as a matter of 'all or nothing'?. I've bought most cars, trucks, tractors paying ~half down and financing the rest. Not draining my bank account, and having a smaller payment to double up on to save interest $$ didn't require a lot of thinking and planning, much less a lesson in economics.

Buying only once 'new', the cash price was all of 9% less that 0% financed. Traded in for ~30%, put ~25% down from savings, then got a 3.01% loan against shares at the CU and paid the 3 yr loan off in two. Ignoring that there might be (other) incentives passed up on by financing at 0% makes as much sense to me as insisting on T&T on a tractor whose 3PH will only carry a counterweight for FEL/grapple use.

If one buys a tractor loaded to the gills because they 'might' use the extra bling, they should resolve that the extras are luxuries that not only cost, but are often where dealer profit lies when 'bare' prices are competitively low. We can have our cake and eat it too, but the ice cream is going to cost extra. IMO there's no discount for overthinking a simple scenario.

 

[arrow]

I agree but sometimes they won稚 come off the inflated price for cash which leaves very little reason to pay in full. In other cases like the one 2 post above mine the difference is very little and you壇 make more than the difference back by investing your money. My buddy bought a Ferris 2100 and said the cash price was $200 less than financing for 5 years. He said it would cost a lot more than $200 to use his money and I agree with the logic. On top of that even adjusted for the mowing season being less than 12 months his payment is less than what a yard crew would charge.

Exactly. Why pay in full if they're charging you extra to take the "free financing" anyway? Finance charges are already built in. Makes it appear justifiable to offer "zero%". There is never any commercial "free money" given by anyone. It is either built into the price, mark-up or "document fees" or coerce you into "incentive buying" of attachments. It's always in there some place..
This just happened to me when buying a new mattress. Company was offering "free financing" for up to two years. I asked for a cash price. It was the same. As they were already charging me for the financing, might as well take their term I was already paying for. Where was their "finance charge" you ask? I only found out later that the movable bed support I purchased for the mattress was $300 more than what other stores were offering for the same brand. Life's too short.

 

[4570Man]

There’s a car dealership locally that is offering 10 year 1 million mile warranty. What’s the catch? I’ve never stopped in and asked for the fine print but I figured there had to be something.

 

[arrow]

Maybe for some manufacturers (Kubota for one) but not all.
I know when I got my JD back in 2007 there was no difference and it was not inflated.
When I got my ASV in 2015 the price was the same either way and I saw the dealer's cost so I know what the real price was. The dealer did not care how it was financed. Whether from my pocket or from the bank or from the Manufacturer's finance plan, the dealer made his profit, the same no matter how it was paid for.
In neither the JD nor the ASV case was there a cash rebate.
That I have seen with car companies and Kubota but those are the only ones that I have seen where it happened.

Your experience and so called proof only applies to the instances that you are familiar with at the time you knew of it.
Same as me.
I only know of the two instances when and where I bought.
Yes I did not get the Kubota as the pricing was VERY shady and I could not get a straight answer from 3 different Kubota dealers.

The proof is not "so called". It is quite evident and it is not simply applied to my "experience". It is simply an act of "financial physics" if you will. You say the price for the unit was "not inflated". That is for comparison purposes only. When a manufacturer arrives at msrp, they can assign any cost they want to arrive at that price including 0%. A rebate is your reward for paying up-front. No rebate can certainly mean that the money is being used to cover the financial cost for the term.