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.