To finance or not to finance ...

[kenmac]

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.

Yep, then you have to figure in the interest you will pay on that $70.00 you earned and the interest on the tractor that you most likely write off on taxes

 

[RSR]

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.

My math was off in the latest post (it's late here) but was correct in my initial calculations, and has been corrected here.

My logic, that's another question...

My point isn't to look at a tractor as an investment. Its not. I'm looking at the idea of financing versus saving and then paying a cash price at a later date (or continuing to invest your money at a higher rate of return than the financed price). That is, the idea of deferred gratification.

The point is, if you always finance everything, you are playing the financial sucker. The exception to this rule as you pointed out (and was discussed a few pages back) is if you have a sufficiently large amount of capital whose investment returns more than offset the interest you are paying on the loan.

If you don't start off with a large sum of capital to offset the finance costs you can quickly build one up by simply defering your purchase (gratification) for six years, or some finite term equal to the term of the loan. At the end of that time frame you then have sufficient capital so that you can either pay cash for your purchase (and still have a significant amount of money left over to continue investing), or as you stated, finance at a lower rate than what your capital is able to earn and continue to earn money that way.

You are absolutely correct that most people don't look at purchases that way. I'm surprised by this, but not surprised at the same time. We live in an era of "I want it and I want it now". Is it any surprise, then, that 40% of adults say they would be unable to handle an unexpected $400 expense?

 

[kenmac]

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.

Yep, it's a scheme to keep you borrowing money. As long as you borrow money, your FICO score will remain high. As you begin to pay down debt, your FICO score goes down.

Borrower is slave to the lender. As long as you borrow form me, I will give you a high FICO score and you can feel good about that high FICO score. But, you will do as I say, or I will come get my tractor. Because until you pay me every cent, It's my tractor !

I bought my MX 5100 used with 380 hrs and paid the man with $100.00 bills. When I left his tractor place, It was my tractor free and clear, and I'm a slave to no one.

Hey, but if financing everything so you'll have a high FICO is for you, Slave away !

 

[GirlWhoWantsTractor]

Yep, it's a scheme to keep you borrowing money. As long as you borrow money, your FICO score will remain high. As you begin to pay down debt, your FICO score goes down.

Borrower is slave to the lender. As long as you borrow form me, I will give you a high FICO score and you can feel good about that high FICO score. But, you will do as I say, or I will come get my tractor. Because until you pay me every cent, It's my tractor !

I bought my MX 5100 used with 380 hrs and paid the man with $100.00 bills. When I left his tractor place, It was my tractor free and clear, and I'm a slave to no one.

Hey, but if financing everything so you'll have a high FICO is for you, Slave away !

I think you're oversimplifying things. Borrowing is not always slavery; paying cash is not necessarily always the best way IMO. You have to be smart about it.

In fact, I have very little debt. But I have a lot of CREDIT, which is the amount I could borrow tomorrow, If I chose to do so.

It is quite simply untrue that as you pay down debt your FICO score goes down. I'm not sure where you learned that. What they want to see is that you can take on a relatively small amount of debt relative to your credit, and pay it off responsibly. The lower the amount of debt you have relative to the amount of credit you have, is what determines your credit score. People who are in hock for every penny of credit they have will have low credit scores, believe me.

But hey, I get it. I was an all-cash girl for a lotta years. I try to strategize a bit better now, and it's working out a lot better for me. But we're all different, with different financial situations and ethics. There is no "one size fits all."

 

[GirlWhoWantsTractor]

....My point isn't to look at a tractor as an investment. Its not. I'm looking at the idea of financing versus saving and then paying a cash price at a later date (or continuing to invest your money at a higher rate of return than the financed price). That is, the idea of deferred gratification.

I'm in complete agreement that "I want it now" can be the enemy of financial security, and we all need to get over that. Unless a tractor is needed to make actual income, if you don't have a substantial bank balance/rainy day fund, good health insurance, reliable transportation, little CC debt, a home with a reasonable mortgage, etc., etc., it's smarter to defer buying a tractor. That won't stop 'em though.

The point is, if you always finance everything, you are playing the financial sucker. The exception to this rule as you pointed out (and was discussed a few pages back) is if you have a sufficiently large amount of capital whose investment returns more than offset the interest you are paying on the loan.

I would never say always finance everything, or always buy with cash. It depends. I bought my Jeep new, maintained it well and kept it for 18 years, and ended up paying around $1200 per year total cost for owning it. Worth it. I bought my current USED car for cash, and it was a great deal. Will soon sell it and again spent around $1000 per year for owning it. Different cars. Different situations. Good results in both cases.

You are absolutely correct that most people don't look at purchases that way. I'm surprised by this, but not surprised at the same time. We live in an era of "I want it and I want it now". Is it any surprise, then, that 40% of adults say they would be unable to handle an unexpected $400 expense?

That is a sad situation, for sure. What keeps us poor, is "thinking like a poor person." Once you start thinking like a rich person, well, that's a good first step. Anyone can do it.

 

[Atchuuu]

GWWT - I agree with you. There are times when financing makes more sense than paying cash. It is the reason that many large companies do not purchase their real estate but lease it. Say real estate is increasing at 4% in your city and a company can make 18% off their product. It is better to invest in the product (18%) instead of cash intensive real estate (4%). Starbucks is an example.

In simple terms, if I can borrow money from you that costs me $3,000 and use my money to make $6,000 then borrowing is a wise decision.

Putting Pizza and Beer on your credit card and then paying the minimum balance does not fall into the "wise" decision category though.

 

[kenmac]

I think you're oversimplifying things. Borrowing is not always slavery; paying cash is not necessarily always the best way IMO. You have to be smart about it.

In fact, I have very little debt. But I have a lot of CREDIT, which is the amount I could borrow tomorrow, If I chose to do so.

It is quite simply untrue that as you pay down debt your FICO score goes down. I'm not sure where you learned that. What they want to see is that you can take on a relatively small amount of debt relative to your credit, and pay it off responsibly. The lower the amount of debt you have relative to the amount of credit you have, is what determines your credit score. People who are in hock for every penny of credit they have will have low credit scores, believe me.

But hey, I get it. I was an all-cash girl for a lotta years. I try to strategize a bit better now, and it's working out a lot better for me. But we're all different, with different financial situations and ethics. There is no "one size fits all."

sorry, but any time you borrow, you are a slave to the lender. There's no doubt about it ! it's in black and white Proverbs 22:7.
You will live by the terms and conditions of the loan,or they will come get what you ever borrowed the money for. It's just that simple

It is also a fact, as you become debt free, your FICO score drops ! Of course it's not the only reason it drops and I didn't say it was. But, It is one reason your FICO score drops

Why Did My Credit Score Drop After Paying Off Debt? - NerdWallet

 

[kenmac]

GWWT - I agree with you. There are times when financing makes more sense than paying cash. It is the reason that many large companies do not purchase their real estate but lease it. Say real estate is increasing at 4% in your city and a company can make 18% off their product. It is better to invest in the product (18%) instead of cash intensive real estate (4%). Starbucks is an example.

In simple terms, if I can borrow money from you that costs me $3,000 and use my money to make $6,000 then borrowing is a wise decision.

Putting Pizza and Beer on your credit card and then paying the minimum balance does not fall into the "wise" decision category though.

large companies lease because of great tax advantages they get from leasing. You can't compare private leasing to a company leasing.
You don't get the same tax advantages as a company. I owned a company. I could write off every meal I ate had I wanted. You as a average person can't do that.

Oh, and that $6000.00 you make. If you make it off investment, or any other legal way. You will pay taxes on interest that 6k made, as well as interest on the money you borrowed. Not true for a business. I would have enough deductions to off set the interest made and the interest paid

 

[kenmac]

either one of you ever heard of this guy ?DaveRamsey.com
I bet he has a little better understanding of debt than most

 

[kenmac]

That is a sad situation, for sure. What keeps us poor, is "thinking like a poor person." Once you start thinking like a rich person, well, that's a good first step. Anyone can do it.

Very close. If you want to be rich, do as the rich . If you want to always be just average, do as the average. If you want to remain poor, do as the poor .
Pretty simple don't you think ?