Financing Cash Purchase versus 0% Financing

[oldballs]

Thank you Mr smstonypoint for your economics presentation. I got the jist of it. However, my personality would make tearing apart a transmission look like fun rather that the permutations of economics which would give me a headache.:confused2:

 

[crazyal]

Ah ha, and then you throw in there the actual changing value of the dollar and you really don't know what to do. The value of the dollar is constantly changing and changes more than one might think in 5 years. So then, over the course of 5 years, is your dollar itself going to be worth more or less, aside from investing it. Inflation, deflation, in what direction are we heading? Either way, those monthly payments may feel heavier in your pocket, or not existant....

And can getting 0% financing when you DO have the cash available really be considered debt? I am in debt on my house, I just do not have that much cash to pay it off, considering we just got it less than 2 years ago. However, I do not feel I am in debt on my tractor since we did have the option to pay cash, but opt for the financing with a large enough down payment to get the monthly payments where we would hardly feel them, without taking all of our savings. However, the fact that we could pay off the loan at any time doesn't really make it feel like a debt in the sense that we owe on something for which we do not have money (I would guess though that my feelings come back to the reason I have never owned a credit card.....Aside from the house, if I don't have the money to buy it, I am not buying it.)

That was my original idea. Pay a large chunk off and finance the rest (and maybe get a couple of extra attachments at the same time). The problem was I really didn't know what I wanted for attachments. I knew I wanted a box blade but didn't know what width or which brand. I wanted two rear remotes but I knew that buying it through Kubota is much more expensive. Like you said, a payment that I really wouldn't notice.

When I found out I could save another $1000 by just paying for it outright it just made more sense to me to pay outright. People keep talking about how much money you could make by financing it but when your plan is to only finance say $10k or so you would need to make 10% on your money to break even and that's not taking into account that as you make payments your principle is dropping.

In my case an added benefit was I was able to refinance my house two months ago for 3.5% without having to have the house appraised or proof of income. I did a refi last spring for 4.625% using the government no proof/ no appraisal and you can only use that once so this time so this time I had to go down the normal path. Since I don't have a lot of debt I qualified for the bank's preferred customer refi program. An extra $200 a month would have pushed me too high. So I would of had to pay the tractor off or pay the extra fees (it turned out to be a savings of $1300).

If the money wasn't quickly convertible to cash to pay the tractor off, say in a 6 month or 1 year CD, I would of had to use cash from somewhere else or waited the full length of the term. Since doing the refi the rate where I got the loan has gone up to 4.25%. When I sat down with the bank and we calculated out the differences between 3.5% and 4.625% it turned out to be roughly $12k savings in interest. All in all it cost me a little over $1200 to refi. By not having a tractor loan I was able to act quicker, and in this case saved over $10k.

My point is you have to do what feels right for you.

 

[smstonypoint]

Thank you Mr smstonypoint for your economics presentation. I got the jist of it. However, my personality would make tearing apart a transmission look like fun rather that the permutations of economics which would give me a headache.:confused2:

Mike,

My mechanical skills are so woeful that I wouldn't even begin to think about tearing apart a transmission.

I suspect that my lectures over the years have been responsible for more than a few student headaches.

Steve

 

[JOHNTHOMAS]

When I found out I could save another $1000 by just paying for it outright it just made more sense to me to pay outright. People keep talking about how much money you could make by financing it but when your plan is to only finance say $10k or so you would need to make 10% on your money to break even and that's not taking into account that as you make payments your principle is dropping.

Being a former Auditor I can't resist pointing out the error here. 10% times $10,000 equals the $1000 you mentioned. You forgot that is for just one year, the first year. You get to keep your money or decreasing parts of it to use for 5 years.
Payment monthly for $10000 is $166.66 times 12= $2000 paid back first year. There is still $8000 left 4th year and then $6000 left 3rd year and then $4000 2nd year then $2000 last year then PAID OFF.
I'm not talking about do it or don't do it. Just pointing out the error in the situation presented.

 

[rjkobbeman]

Here is the breakdown if you keep $20,000 and put it in an account earning 4% per year. You use this $20,000 in the account to pay your 0% loan. Each month the balance goes down.

The first column is the balance in your account. The center column is the interest earned each month. The third column is the loan balance.

As you can see, you earn $2,320.07 by using the 0% loan and investing your $20k. If you get a $1,000 rebate for paying cash, you really only earned $1,320.07 by going with the 0% loan... but you still MADE over $1k by going with the 0% loan instead of paying cash.

APY 0.04
MPY 0.003333333
Payment 333.33

$20,000.00 $66.67 19,666.67 1st year
$19,733.33 $65.78 19,333.33
$19,465.78 $64.89 19,000.00
$19,197.33 $63.99 18,666.67
$18,927.99 $63.09 18,333.33
$18,657.75 $62.19 18,000.00
$18,386.61 $61.29 17,666.67
$18,114.56 $60.38 17,333.33
$17,841.61 $59.47 17,000.00
$17,567.75 $58.56 16,666.67
$17,292.98 $57.64 16,333.33
$17,017.29 $56.72 16,000.00

$16,740.68 $55.80 15,666.67 2nd year
$16,463.15 $54.88 15,333.33
$16,184.69 $53.95 15,000.00
$15,905.30 $53.02 14,666.67
$15,624.99 $52.08 14,333.33
$15,343.74 $51.15 14,000.00
$15,061.55 $50.21 13,666.67
$14,778.42 $49.26 13,333.33
$14,494.35 $48.31 13,000.00
$14,209.33 $47.36 12,666.67
$13,923.36 $46.41 12,333.33
$13,636.44 $45.45 12,000.00

$13,348.56 $44.50 11,666.67 3rd year
$13,059.73 $43.53 11,333.33
$12,769.92 $42.57 11,000.00
$12,479.16 $41.60 10,666.67
$12,187.42 $40.62 10,333.33
$11,894.71 $39.65 10,000.00
$11,601.03 $38.67 9,666.67
$11,306.37 $37.69 9,333.33
$11,010.72 $36.70 9,000.00
$10,714.09 $35.71 8,666.67
$10,416.47 $34.72 8,333.33
$10,117.86 $33.73 8,000.00

$9,818.25 $32.73 7,666.67 4th year
$9,517.64 $31.73 7,333.33
$9,216.04 $30.72 7,000.00
$8,913.42 $29.71 6,666.67
$8,609.80 $28.70 6,333.33
$8,305.17 $27.68 6,000.00
$7,999.52 $26.67 5,666.67
$7,692.85 $25.64 5,333.33
$7,385.16 $24.62 5,000.00
$7,076.44 $23.59 4,666.67
$6,766.70 $22.56 4,333.33
$6,455.92 $21.52 4,000.00

$6,144.11 $20.48 3,666.67 5th year
$5,831.25 $19.44 3,333.33
$5,517.36 $18.39 3,000.00
$5,202.42 $17.34 2,666.67
$4,886.42 $16.29 2,333.33
$4,569.38 $15.23 2,000.00
$4,251.28 $14.17 1,666.67
$3,932.11 $13.11 1,333.33
$3,611.89 $12.04 1,000.00
$3,290.59 $10.97 666.67
$2,968.23 $9.89 333.33
$2,644.79 $8.82 0.00
$2,320.27

$2,320.27

In this example, I use $40,000 as the tractor price and use 3% as the interest yield. (Higher tractor price but lower interest yield.) As you can see, you earn $3,366.86 by investing and going with 0% loan. Again, subtract the $1,000 discount for paying cash and you can see you come out ahead by $2,366.86.

APY 0.03
MPY 0.0025
Payment 666.67

$40,000.00 $100.00 39,333.33 1st year
$39,433.33 $98.58 38,666.67
$38,865.25 $97.16 38,000.00
$38,295.75 $95.74 37,333.33
$37,724.82 $94.31 36,666.67
$37,152.46 $92.88 36,000.00
$36,578.68 $91.45 35,333.33
$36,003.46 $90.01 34,666.67
$35,426.80 $88.57 34,000.00
$34,848.70 $87.12 33,333.33
$34,269.16 $85.67 32,666.67
$33,688.16 $84.22 32,000.00

$33,105.72 $82.76 31,333.33 2nd year
$32,521.81 $81.30 30,666.67
$31,936.45 $79.84 30,000.00
$31,349.63 $78.37 29,333.33
$30,761.33 $76.90 28,666.67
$30,171.57 $75.43 28,000.00
$29,580.33 $73.95 27,333.33
$28,987.62 $72.47 26,666.67
$28,393.42 $70.98 26,000.00
$27,797.74 $69.49 25,333.33
$27,200.56 $68.00 24,666.67
$26,601.90 $66.50 24,000.00

$26,001.74 $65.00 23,333.33 3rd year
$25,400.07 $63.50 22,666.67
$24,796.91 $61.99 22,000.00
$24,192.23 $60.48 21,333.33
$23,586.05 $58.97 20,666.67
$22,978.35 $57.45 20,000.00
$22,369.12 $55.92 19,333.33
$21,758.38 $54.40 18,666.67
$21,146.11 $52.87 18,000.00
$20,532.31 $51.33 17,333.33
$19,916.97 $49.79 16,666.67
$19,300.10 $48.25 16,000.00

$18,681.68 $46.70 15,333.33 4th year
$18,061.72 $45.15 14,666.67
$17,440.21 $43.60 14,000.00
$16,817.14 $42.04 13,333.33
$16,192.52 $40.48 12,666.67
$15,566.33 $38.92 12,000.00
$14,938.58 $37.35 11,333.33
$14,309.26 $35.77 10,666.67
$13,678.37 $34.20 10,000.00
$13,045.90 $32.61 9,333.33
$12,411.85 $31.03 8,666.67
$11,776.21 $29.44 8,000.00

$11,138.98 $27.85 7,333.33 5th year
$10,500.16 $26.25 6,666.67
$9,859.75 $24.65 6,000.00
$9,217.73 $23.04 5,333.33
$8,574.11 $21.44 4,666.67
$7,928.88 $19.82 4,000.00
$7,282.03 $18.21 3,333.33
$6,633.57 $16.58 2,666.67
$5,983.49 $14.96 2,000.00
$5,331.78 $13.33 1,333.33
$4,678.44 $11.70 666.67
$4,023.47 $10.06 0.00
$3,366.86

$3,366.86


If any of my math is wrong, please let me know.

 

[LostInTheWoods]

Well, that too!:laughing: He was an intellectual giant, I fall well short in that category.

Steve

You're a good sport, Steve. Hope you have a great 2011!

 

[smstonypoint]

You're a good sport, Steve. Hope you have a great 2011!

Thanks, and the same to you.

Steve

 

[crazyal]

Being a former Auditor I can't resist pointing out the error here. 10% times $10,000 equals the $1000 you mentioned. You forgot that is for just one year, the first year. You get to keep your money or decreasing parts of it to use for 5 years.
Payment monthly for $10000 is $166.66 times 12= $2000 paid back first year. There is still $8000 left 4th year and then $6000 left 3rd year and then $4000 2nd year then $2000 last year then PAID OFF.
I'm not talking about do it or don't do it. Just pointing out the error in the situation presented.

I should have been a little more clear. I was saying you need to make a total of 10% over the lifetime of the loan and I didn't want to get into it as deep as rjkobbeman just did about the making payments but looking at his numbers you would need to make about 4% each year to make a total of 10% for a 60 month loan.

If you think you can make 10% each year without risks I would say go for it. But usually as the reward goes up so does the risk. Like I said, for some people it's a great deal that they can use to their advantage. For others they most likely wouldn't feel comfortable doing so.

 

[rjkobbeman]

I'm not real savvy with investments... just have a 401(k) that we (wife and I) pretty much leave alone.

Is there anything out there that can give you a 3% APY and be fairly liquid? I'm sure if you had to execute trades on a monthly basis it would eat away at your profits.

BTW, those numbers I posted are in a spread sheet. I can repost with any $$$ amount and yield you want real easy. Let me know of you want other examples.

 

[blueriver]

I don't believe there is any such critter as 0% financing ... I was quoted a price the other day on a piece of equipment and then told to add 14% if I decided to take the financing ... it appears to be built in the price.

So ... use my cash to buy it and did I just earn 14% on my money???