To finance or not to finance ...

[Diggin It]

^^ I figured it was a typo and should be 1,000.00/year. My statement breaks out the P & I and shows the interest to be a little over $100.00/month on $19,000 for 7 years. I figure they do like mortgages and front load the interest amount with that portion decreasing over time.

 

[prof fate]

So then, go into debt like mad now - enjoy that tractor, that camper, that corvette! If you die next week you never had to pay for it!

Sorta liek when I went into a plumbing store and chatting with the guys, i said "I'll have to live to be a 100 to get everything done on my list" and the one repsonded " You're doing it all wrong. If you can procrastinate well enough, you'll die before you have to do any of it!"

I haven't read every post here but I would like to say, you only live once. If you want a tractor by all means buy you a tractor. Your not guaranteed tomorrow, your not guaranteed the rest of this day. What's the point in working/earning money if your not going to spend it? If you don't spend it, when you die, someone will spend it for you. <---that is a guarantee!

 

[4570Man]

^^ I figured it was a typo and should be 1,000.00/year. My statement breaks out the P & I and shows the interest to be a little over $100.00/month on $19,000 for 7 years. I figure they do like mortgages and front load the interest amount with that portion decreasing over time.

Do you have any proof of that interest rate? Because I don’t believe it. That’s $8500 nearly half the cost of the total loan. I think we can all agree the manufacturer 0 percent has a little extra factored in somewhere, but it’s a lot closer to zero than half.

 

[prof fate]

Well...
i financed by 2014 subaru, 1.23% financing and use it for business so I deduct the interest charge..never over $150 a year.
My kioti is 0% interest..nothing itemized on my invoice, but I hear there is a $900 charge up front (or lack of a discount..take your pick). 6 year loan..$150/year.

Assuming I had 22k in the bank I'd be earning interest on it..maybe only 1% (i do have a savings account paying that as of today). 1% interest on 22k is $220. So that's $70 MORE in interest TO ME than I'm paying on the loan for the tractor.

yes, 8% on a 30 yeary mortgage is a lot of money. But I'm paying 3.2% on a 15 year mtg. And the mtg stays put- unlike rent that goes up annually.

Few people save up 30k and pay cash for a new car, then begin saving again for the next one. And if you do that, while you do have a bank balance, it's still a payment every month.

The comment,

"The what, $100/year or so interest charge is the 'rent' on the $20k loan. Use their money, not my money - and get the tractor NOW, not years from now. Well worth the $100 'extra' the interest is gonna be."

is my main point in this thread.

If you actually run hard numbers (see my first post) the cost of financing is a staggering high amount. It can amount to $1,000's of dollars per year in finance charges, lost investment opportunity (paying interest as opposed to earning it), etc. not the ~$100/year as you are stating.

Now, having said that, my analysis also ignores intangibles such as the satisfaction of using the tractor, ability to get projects done, etc. As many have pointed out, that is not an insignificant consideration.

The point at which everything becomes an acceptable "cost" will clearly be different for each person, and is a largely personal decision with many factors to consider. Again, with many great examples in this thread.

However, I think the true financial impact on the wallet is often overlooked, or even downplayed, without developing a complete picture of the financial ramifications.

That is, it's easy to "buy into" (pun intended ) the salesman speak of "hey, this nicer tractor is only an extra $50/month on the loan," which is really just a clever sales trick to obfuscate the true cost.

 

[RSR]

My kioti is 0% interest..nothing itemized on my invoice, but I hear there is a $900 charge up front (or lack of a discount..take your pick). 6 year loan..$150/year.

Assuming I had 22k in the bank I'd be earning interest on it..maybe only 1% (i do have a savings account paying that as of today). 1% interest on 22k is $220. So that's $70 MORE in interest TO ME than I'm paying on the loan for the tractor.

Current listings on Tractorhouse.com show a $2,100 discount for cash purchases on Kioti tractors (Ck3510).

Smart investing of your money will easily get you closer to a 5% return. Even CD's are getting 3%. Also, the interest you computed on the principal neglects annual compounding.

$22,000 compounded annually at 3.0% turns into $26, 269.15 at the end of 6 years. Adding that to the extra $2,100 charge to get 0% interest on a loan, the difference between finance and cash price 6 years later turns out to be a $6,369.15 difference. Put another way, a 29% increase in the price originally paid for the tractor. That's no small amount of change.

You're right that few people save money first for a purchase, and then after saving, buy it, and start saving for the next. Instead, most people finance a purchase, and once it's paid off, finance the next purchase. Comparing those two approaches amounts to an astronomical sum of money over a lifetime.

As stated earlier, one of my favorite quotes is, "Those who understand interest earn it, those that don't, pay it."

 

[Atchuuu]

Current listings on Tractorhouse.com show a $2,100 discount for cash purchases on Kioti tractors (Ck3510).

$22,000 compounded annually at 3.0% turns into $26, 269.15 at the end of 6 years. Adding that to the extra $2,100 charge to get 0% interest on a loan, the difference between finance and cash price 6 years later turns out to be a $6,369.15 difference. Put another way, a 29% increase in the price originally paid for the tractor. That's no small amount of change.

As stated earlier, one of my favorite quotes is, "Those who understand interest earn it, those that don't, pay it."

I don't follow your example. If he is getting 0% interest on the tractor then the cost of the tractor is $22,000.

A cash purchase would reduce the price by $2,100 or 9.5% so you could argue that the cost of financing is 9.5% right off the bat.

If you pay cash the tractor is $19,900 (after rebate of $2,100)

If you put the $19,900 into a investment (instead of buying a tractor) earning 3% annually the value is $23,761 at the end of 6 years.

So financing the tractor at a cost of $22,000 with zero interest and leaving the $19,900 in the bank would actually earn the purchaser $1,761. This doesn't factor in the cost of any doc fees, insurance requirements, etc.

How do you come up with $6,369. difference between cash and financing? You can't add the cost of the rebate to the compounded interest on $22,000.

Did I misunderstand?

 

[4570Man]

How much is it worth having a tractor for 5 years? Renting a machine once a year would cost more than the interest. If you don’t need a machine more than once a year than you probably don’t need one.

 

[Atchuuu]

If the cost of the tractor were $22,000 with 0% interest regardless of whether it was financed or you paid cash the purchaser could earn $4,269. by leaving the money in the bank at 3% interest for 6 years.

 

[Atchuuu]

How much is it worth having a tractor for 5 years? Renting a machine once a year would cost more than the interest. If you don’t need a machine more than once a year than you probably don’t need one.

If the interest were zero percent then everything would cost more than the interest. Are you referring to renting costing more than the payment for a year?

 

[RSR]

I don't follow your example. If he is getting 0% interest on the tractor then the cost of the tractor is $22,000.

A cash purchase would reduce the price by $2,100 or 9.5% so you could argue that the cost of financing is 9.5% right off the bat.

If you pay cash the tractor is $19,900 (after rebate of $2,100)

If you put the $19,900 into a investment (instead of buying a tractor) earning 3% annually the value is $23,761 at the end of 6 years.

So financing the tractor at a cost of $22,000 with zero interest and leaving the $19,900 in the bank would actually earn the purchaser $1,761. This doesn't factor in the cost of any doc fees, insurance requirements, etc.

How do you come up with $6,369. difference between cash and financing? You can't add the cost of the rebate to the compounded interest on $22,000.

Did I misunderstand?

You're right in that my comparison was actually not a fair one. I made a mistake in computing the interest on the financed, as opposed to cash, price.

So, here is a corrected comparison.

Option 1: Buy a tractor and finance at 0%. Total cost $22,000 (Get the tractor today). Make a payment of $305.55/mo for 6 years.

Option 2: Save $305.55/mo and invest it at a conservative rate of 3%, compounded annually. At the end of 6 years, you will have a cash balance of $24,102.47. Now, buy the tractor at the reduced cash discount price of $22,000 - $2,100 = $19,900. You are left with a balance of $4,502.47. That is still a significant sum of money.

A higher return on your money will make an even bigger difference, while high inflation (considered negligible here) will quickly eat up all of your investment returns.

The point is, putting off the first big purchase until you can pay cash, and then saving and investing your money for your future purchases, as opposed to always financing everything, will have a significant impact over, say, a 30 - 40 year period as a working adult.

 

[Atchuuu]

I save $500/mo for 5 years, so that at the end of 5 years I have $30,000. But, as I save, I invest the money in a S&P500 Index Fund. Historically, the S&P500 has earned 10% interest, with 3% inflation. So, assuming a 7% return on my money, at the end of 5 years, I will have $35,799.00 (minus a negligible amount for management fees), yielding a PROFIT of $5,799.

By my calculations you would have $36,500 at the end of 5 years but you wouldn't have a tractor now.

 

[RSR]

By my calculations you would have $36,500 at the end of 5 years but you wouldn't have a tractor now.

View attachment 576121

Values will vary slightly based on whether the calculator assumes you put the money in at the start of the month (and begin earning interest in the first month) or if you put it in at the end of the month, and then start earning interest at the start of the following month (how I calculated it). That is why my value is slightly lower.

Regardless, yes, I still don't have a tractor.

 

[4570Man]

If the interest were zero percent then everything would cost more than the interest. Are you referring to renting costing more than the payment for a year?

No I meant the interest which is quite unlikely to be actually zero dollars. If the interest is truly zero percent as in it takes 24,989 dollar in cash to buy the tractor and all the payments add up to 24,989 than this seems like a no brain required question. At that point the only possible thing you could say is you probably have to pay insurance in the financed machine. I’m going to do that anyway. It’s not lot a of money to sleep good at night. It also saves work. I’m going to leave an insured machine where I’m going to use it the next day. A not insured machine is going home every night.

 

[Atchuuu]

Option 2: Save $305.55/mo and invest it at a conservative rate of 3%, compounded annually. At the end of 6 years, you will have a cash balance of $24,102.47. Now, buy the tractor at the reduced cash discount price of $22,000 - $2,100 = $19,900. You are left with a balance of $4,502.47. That is still a significant sum of money.

You have made the assumption that the tractor, 5 years from now, will be at the same price it is today. It will not. This exercise only shows that we can all rationalize our reasons for doing or not doing just about anything. I suggest that if you need a tractor get one. Even if you don't really have to have one you will have to decide if it gives you $305. a month worth of joy. For me the answer is yes. Not everything in life is an investment.

 

[Atchuuu]

No I meant the interest which is quite unlikely to be actually zero dollars. If the interest is truly zero percent as in it takes 24,989 dollar in cash to buy the tractor and all the payments add up to 24,989 than this seems like a no brain required question. At that point the only possible thing you could say is you probably have to pay insurance in the financed machine. I’m going to do that anyway. It’s not lot a of money to sleep good at night. It also saves work. I’m going to leave an insured machine where I’m going to use it the next day. A not insured machine is going home every night.

:thumbsup: Agreed. If a zero percent financing deal is the same as a cash deal then take the financing every time. If you don't have any cash and need a tractor, take the financing every time.

The only decision to be made is when there is a cash discount, you have the cash and you can and will invest it. At that point you might look at the cost/benefit of financing vs cash.

Otherwise this is just a hypothetical situation that won't get the grass cut or the crops in. Kudo's to those that can save for 5 years and still want the thing they saved for.

 

[4570Man]

If you were saving to buy a tractor wouldn’t you buy the tractor as soon as you saved enough money not at a set 5 years? At least that what I would do. That makes whatever money you might have earned negligible. Then any calculations here assume you made your monthly payment to the savings account religiously. Most people aren’t going to do that. It also assumes you never take money out of the account to fix whatever calamity happens. It also assumes you don’t need the tractor for 5 years. It also assumes your time here on earth doesn’t run out. My vote is buy your tractor as long as you can afford it.

 

[RSR]

You have made the assumption that the tractor, 5 years from now, will be at the same price it is today. It will not.

Yes, that is why I also said, "A higher return on your money will make an even bigger difference, while high inflation (considered negligible here) will quickly eat up all of your investment returns."

 

[Atchuuu]

If you were saving to buy a tractor wouldn’t you buy the tractor as soon as you saved enough money not at a set 5 years? At least that what I would do. That makes whatever money you might have earned negligible. Then any calculations here assume you made your monthly payment to the savings account religiously. Most people aren’t going to do that. It also assumes you never take money out of the account to fix whatever calamity happens. It also assumes you don’t need the tractor for 5 years. It also assumes your time here on earth doesn’t run out. My vote is buy your tractor as long as you can afford it.

It also assumes tractors stay the same price, the stock market returns 7% annually and that the property maintains itself for the next 5 years.

It is true that the S&P averaged 10.6 for a period up to 2017. It is also true that if you planned to buy your tractor in 2008-2009 you would have seen a 40% drop in your investment.

While I generally agree that paying cash is the way to go this is not always practical and it is not always the cheapest.

To the OP, if you came here for us to help you rationalize your purchase then consider it mission accomplished. Now start a thread on what to buy. We will gladly give our opinion there too.

 

[GirlWhoWantsTractor]

You're right in that my comparison was actually not a fair one. I made a mistake in computing the interest on the financed, as opposed to cash, price.

So, here is a corrected comparison.

Option 1: Buy a tractor and finance at 0%. Total cost $22,000 (Get the tractor today). Make a payment of $305.55/mo for 6 years.

Option 2: Save $305.55/mo and invest it at a conservative rate of 3%, compounded annually. At the end of 6 years, you will have a cash balance of $24,102.47. Now, buy the tractor at the reduced cash discount price of $22,000 - $2,100 = $19,900. You are left with a balance of $4,502.47. That is still a significant sum of money.

A higher return on your money will make an even bigger difference, while high inflation (considered negligible here) will quickly eat up all of your investment returns.

The point is, putting off the first big purchase until you can pay cash, and then saving and investing your money for your future purchases, as opposed to always financing everything, will have a significant impact over, say, a 30 - 40 year period as a working adult.

Sorry, RSR, but your math was off, and I think your logic is off a bit too. Almost no one here is considering a tractor to be an "investment," as in, "I have $20k lying around.....should I invest in CDs, stocks, bonds, real estate, or buy a tractor? Which will get the best return?"

As someone else said, sure you could invest your $500/month tractor payment in something else and probably get some kind of return....but you wouldn't have a tractor.

FTR, most of these 0% interest tractor loans have a "loan fee" that is wrapped into the tractor price; usually around $1-2k, depending on the size of the tractor. That's it. That's the cost of the loan over the whole period of the loan. Only downside to 0% is that if you pay it off early you still pay the whole loan fee. That's why I went with the low-interest option, not the 0 interest option. I got the cash price, and I intend to pay it off early. Sort of hedging my bets.

IDK, I don't pretend to be a financial genius, but rich folks finance almost everything (as long as interest rates are relatively low). They hang on to their capital with a kung-fu grip. Final point: in a dicey economy, cash is king. IOW, hang on to it.

Okay, final, final point: Financing something and then paying it off early helps your credit score a lot. A good credit score will save you more money over the years than almost anything else you can do.

 

[RSR]

It also assumes tractors stay the same price, the stock market returns 7% annually and that the property maintains itself for the next 5 years.

It is true that the S&P averaged 10.6 for a period up to 2017. It is also true that if you planned to buy your tractor in 2008-2009 you would have seen a 40% drop in your investment.

While I generally agree that paying cash is the way to go this is not always practical and it is not always the cheapest.

To the OP, if you came here for us to help you rationalize your purchase then consider it mission accomplished. Now start a thread on what to buy. We will gladly give our opinion there too.

Trust me, I am getting much closer to the purchase. Mainly because my wife has started to threaten bodily harm if she has to listen anymore to me talk about one, as opposed to just buying one.

If Uncle Sam is as kind to me as I think he is going to be this January, I will purchase one then.

I was hoping to purchase one by this fall (as snow removal is my main priority), but my failed septic system this past Spring dictated otherwise. Again, it's nice to have some cash reserved for these types of occurrences, but it really puts the hurt on my tractor savings.