Low interest loan instead of paying cash from investments?

[eta2020]

If you make deal simple for a dealer you will negotiate best deal and cash means simple.

Having dealer to go through paperwork of 0% financing will cost him and you. It is not free as it looks.

[eta2020]

Even if price of car is same and you find 2% CD this entire process is not worth effort.
Because:

Inflation will eat up 2%.
Feds will take on taxes 0.7% from your interest. State will take 0.1 %.

So you will end up -0.8% after going through needless paperwork's. It is not worth an effort. It is waste of time.

[2B]

Quote:

Originally Posted by Meadbh Oh really? What you are implying is that if someone like me wants to get a good deal that will ultimately save several thousand dollars, it means she can't afford the car, despite the fact that the price of the car is ~ 1.1% of her NW. Just because someone is FI doesn't mean money should be wasted.

It depends on how much risk and trouble you want to go through to save the money. I used what I thought was a very high spread of 5% and the savings over the 3 year loan would be $2,250 (before taxes) if everything goes well. If you don't get the higher return, you don't get that much. If you happen to be late for a payment, you may lose the low interest rate or have it raised retroactively. You had to sit through the financing hassle with the dealer. So, your 1% of your net worth you spent on your car might save you 0.075% of your net worth spread out over several years. Take the safe route with a 1% spread to a CD and you save $450 (before taxes) at 0.015% of your NW over the 3 years. You can decide how aggressive you want to be and how much trouble you want to go through. In any case, I don't consider that amount of money worth worrying about when it requires me to take out loans I don't need. Also, I've not seen many instances where a lower price wasn't available if the low interest financing was not taken.

[NW-Bound]

Quote:

Originally Posted by Meadbh Oh really? What you are implying is that if someone like me wants to get a good deal that will ultimately save several thousand dollars, it means she can't afford the car, despite the fact that the price of the car is ~ 1.1% of her NW. Just because someone is FI doesn't mean money should be wasted.

Hmm... I think we are thinking alike.

Just looked at my Quicken screen, which told me my AA at a glance. I have enough cash right now to buy both of my homes all over and still have money left over to get a small condo somewhere (darn, RE prices are still terrible according to Zillow, although they have recovered some).

But that does not mean I will turn away some money, if I were in the market for a new car.

Let's see. A $25K at 2% means $500/yr. After tax, which is low due to my financial arrangement, with that money I can get quite a few bottles of XO, or a few tanks of gas for my RV. I would say that it is worthwhile. I do not even drink that many bottles of XO a year!

About risk of late payments and the hassle of it, my wife-secretary-assistant has a way of arranging automatic payments for all of our bills. It is so that we would be traveling without having to worry about missing any bill. And it is my job to keep at least 2 months of expenses in the checking account to avoid the overdraft. Never missed a bill in the 33 years that we have been married.

[Meadbh]

Responses below in bold.

Quote:

Originally Posted by 2B It depends on how much risk and trouble you want to go through to save the money. I used what I thought was a very high spread of 5% and the savings over the 3 year loan would be $2,250 (before taxes) if everything goes well. If you don't get the higher return, you don't get that much. True, but my analysis of the markets has turned out to be correct so far. If you happen to be late for a payment, you may lose the low interest rate or have it raised retroactively. It's set up as an automatic deduction. You had to sit through the financing hassle with the dealer. Oh poor little me! It was a breeze. So, your 1% of your net worth you spent on your car might save you 0.075% of your net worth spread out over several years. Take the safe route with a 1% spread to a CD and you save $450 (before taxes) at 0.015% of your NW over the 3 years. You can decide how aggressive you want to be and how much trouble you want to go through. In any case, I don't consider that amount of money worth worrying about when it requires me to take out loans I don't need. Also, I've not seen many instances where a lower price wasn't available if the low interest financing was not taken. I had done a lot of research prior to making the purchase and this was the best deal available within 200 km. .

[sailor]

Also keep in mind that some automakers also frequently have incentives ("cash back") for cash buyers.
But it's all model dependent, so worth following these for a while before purchase.

[Katsmeow]

We did take a low interest loan on a car. For retirees there is another factor that can come into play. At the time, almost all of your cash was in tax deferred accounts. So, paying cash for the car meant taking money out of the IRA and paying tax on the withdrawal. For that year, we were at a higher marginal tax rate than I anticipated we would be in this year. So, we would save considerably by taking a car loan, even if we held the loan to maturity.

Oh, the price of the car did not vary depending upon whether we took out a loan or didn't take out the loan.

[gauss]

Quote:

Originally Posted by eta2020 Not everybody can join it. I can not. Show me place that pays 2% CDs and is available to everybody.

eta2020,

I think if you can open a bank account in the U.S. then you can probably join PenFed.

Sure the main ways of qualifying are defense industry related, but I think that almost anyone can join the NMFA for a one time small fee. That is what I did to access PenFed's very competitive home loan refi's and HELOCs.

-gauss

[HappyOutsourced]

Thank you all for your input. Very intelligent discussion here! There are a lot of things mentioned I had not considered.
I particularly had not thought about the short time period of the loan as opposed to the overall positive move of the market over longer periods of time. I suppose the market could drop just as you got the loan which means you'd be pulling money out to make the payments at a really bad time. And 5 years is too short a time to expect a huge recovery. A 30 year mortgage would be a different story.
But as for me - I like the peace of mind of being debt free too.
I love this forum and am learning a lot!

[HappyOutsourced]

Oh, I'd like to know about those CDs too. Ah, the nostalgia of 2% ...such memories....

[jimnjana]

Quote:

Originally Posted by eta2020 Not everybody can join it. I can not. Show me place that pays 2% CDs and is available to everybody.

anybody can join, once you become a member of a non profit for 20 bucks. the link is on their website.

[NW-Bound]

I've mentioned bankrate.com.

For 3-yr CD: PenFed 2.02%, Intervest Bank 1.45%, ...

For 5-yd CD: PenFed 2.02%, Barclays 2.00%, Everbank 1.96%, GE 1.95%, etc...

[Gearhead Jim]

Since we hadn't made a major purchase on credit for over a decade, we took the low interest loan from Toyota to buy my wife's current car 3 years ago. Partly to help our credit score, and partly because I believed our money would earn more than the Toyota interest.

So far, our investments have been waay ahead of the interest.

But generally, I hate borrowing money. This may be our last big credit purchase, ever.

[HFWR]

Quote:

Originally Posted by Gearhead Jim Since we hadn't made a major purchase on credit for over a decade, we took the low interest loan from Toyota to buy my wife's current car 3 years ago. Partly to help our credit score, and partly because I believed our money would earn more than the Toyota interest. So far, our investments have been way ahead of the interest. But generally, I hate borrowing money. This may be our last big credit purchase, ever.

+1

[karluk]

The way I do accounting is to include the value of all our debts as a negative item subtracted from our fixed income investments (with "fixed income" consisting primarily of the stable value fund in our retirement accounts). In my view this approach has two hightly beneficial consequences. First it prevents me from thinking that our net worth is higher than it actually is - if I make a major purchase, the cost is immediately deducted from our investment portfolio, even if it will take years to fully pay off a loan. Secondly, I have an easy way of calculating whether I'm better off taking the loan or paying cash. Roughly speaking, I'm better off if the interest rate on the loan is lower than the yield on the stable value fund, although there are also tax consequences that can swing the benefit in favor of the loan.

I calculate I've benefited by tens of thousands of dollars over the years by taking low cost loans. Most of them have been zero percent offers on credit cards, but I've also taken two car loans. One of them was a 0.99% three year loan and the other was 0% for five years.