To finance or not to finance ...

[RSR]

In today's society, there seems to be a strong, almost default, tendency to finance purchases. Tractor purchases do not seem to be an exception. In my case in particular, a tractor purchase is (will be) largely a toy. Sure, it will save me time, and allow me to do things around my property I otherwise would not be able to do, but I have survived just fine without it for years, and could continue doing so.

The question, then, is if it is worth financing it to get said projects done earlier and enjoy the luxury of it, or should I wait until I can pay cash?

A simple analysis.

Lets assume a new tractor price of $30k.

Option 1:

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.

Option 2:

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.

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!

That is money that I will never see again, and will never recoup in reselling the tractor, as it is lost in interest.

In other words, it's roughly 1/3 of the price of the tractor, which seems an incredibly steep amount for an item that is not necessary for my livelihood. I realize that down payments, interest rates, etc. will all affect the numbers, but in the end, I think it comes back to a statement I heard years ago. "Those that understand interest earn it, those that don't pay it."

Am I missing something? Why does it seem so many individuals finance tractors, then?

 

[prof fate]

first, there is no guarantee the sp fund will do that - I"ve averaged 3.3% on my retirement..barely more than inflation. And you pay income tax on that interest as well.
Steel tariff (real or imagined) is driving up the price of steel and tractors - a lot perhaps.

What is 5 years USE of the tractor worth? If say, you needed to rent something to do work now and then over 5 years...a lot more perhaps than the interest.

My kioti was 0 down, 0% interest...sorta changes you math some.

If you can pay cash, used is way better (economically/ROI wise) than new.

So it's a toy..aka hobby..FUN, right? So you can have fun for 5 years or be mizer like watching your piggy bank grow fat and be bored for 5 years.

If you really want to calc things - if you get a tractor now you'll have fuel and maintence cost. If you wait 5 years you'll save that money too.

But then if you never buy a tractor you'll save even more!

 

[Zebrafive]

Main reason is 0% offers.
Also I would bet many do not understand how to invest in the stock market, so they look at the .01 -.05% interest their bank/credit union pays them, not the 7% you used.
Then there is the instant gratification of getting it NOW.

 

[Fuddy1952]

If you need it, but it. If it's a toy you really don't need it's foolish. You'd be better off paying someone else for occasional projects that come up.
If you need it, will use it a lot, and qualify there is 0% financing, some manufacturers.

 

[finn1]

I don稚 follow your logic.

The two numbers should be subtract, not added. the way I look at it, meaning that at the end of the payment period you will have about $1800 more cash in hand if you finance at 5% rather than cash in an investment that is returning 7%.

Alternatively, delaying the purchase five years until you save enough for a cash purchase may not be best either, as your health and longevity isn稚 guaranteed, and a new tractor will cost more, just because of inflation, (and increased tariffs at the current policy), plus you miss out on the utility of having use of the tool for those five years.

On the other hand, if you don稚 either need or want a tractor in the first place, why buy one?

The 0% financing offers have to be looked at with a jaundiced eye, as they are often buy downs in lieu of cash discounts. When I was looking at excavators, JD offered 0% at 72 months, but my credit union at 4.4% was actually a better deal because of the cash in lieu of the JD financing.

 

[jeff9366]

I am retired.

I live primarily on IRA withdrawals, supplemented by Social Security.

If I made a large IRA withdrawal for a cash tractor purchase, my income tax bracket would increase.

I finance, because tractor purchase is cheaper that way.

Once IRA Minimum Required Distributions kick in, it may go the other way.

 

[Silvic]

You should be able to get a deal close to 0% if not 0% from the manufacturer. (Unless they have stopped those programs)
In addition as was pointed out your gain on the 5 year investment will have taxes on the dividends and or/cap gain so take off 20% for the government unless you fall into that bad category and then 23.8%. (Add another 7-9% more if your state gets involved)
The opportunity cost loss of not having it is big, unless you don't really need it and it is just a play toy, then I would not waste 30k on a play toy. But if you have projects that you are going to use it for then 5 years of back breaking labor on your body as it ages has a very finite cost to your long term health. Just because you are not a professional does not mean you don't have a real good reason to own and use one.

 

[wagne223]

Money is cheap right now.

Most people cannot save.

Life is short. If you can afford the payment, go for it.

In 5 years, that $30k tractor will be $37k or more. So even paying interest you come out ahead.

Any financial planner would tell you to leave your cash in the market and finance the tractor.

Since you dont have the cash right now, see my first 3 points.

Dont forget to post pics of your new toy!

 

[jeff9366]

If 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.

1. Highly doubtful S&P will provide 7% net return over the next seven years. S&P today is delicately balanced on peak earnings.

2. $5,799 - (Management Fees) - (Federal Income Tax) - (State Income Tax) paid to IRS yearly, reducing compound return significantly, perhaps 25%. {$4,349}

3. What is your assumption for CPI inflation over the next five years? Mine is 4%. Machinery likely 5%, higher if selective tariffs reduce competition.

 

[prichard]

We are fortunate in that most of what we purchase we could buy for cash if we wanted. We finance for our benefit. I just bought a new camper, financed to get $1000 off the price. Interest rate is like 8 or 9%, so I made sure there was no prepay penalty and will make first payment the last. I also bought a new truck, interest rate is 4%, I can make more on investments than 4% so I'll make payments. I will however pay more than the montly payment and bring total interest paid down some. We also use Lowes and HD 0% offers quite often.

Just depends on what makes the most financial sense at the time.