Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
zero % interest for 60 months
Old 04-20-2010, 01:46 PM   #1
Dryer sheet aficionado
 
Join Date: Feb 2010
Location: Rockies
Posts: 27
zero % interest for 60 months

Am I missing something here?
60 month at zero % or $2,000 cash back on a new truck to replace the 10 year old one that we have. I ASSUME that 0% is the way to go
and leave the cash in the bank/market wherever. I can't stand the thought of a payment........but 0% sounds good....any words of wisdom
__________________

__________________
sayhey24 is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 04-20-2010, 03:29 PM   #2
Thinks s/he gets paid by the post
 
Join Date: Jul 2005
Posts: 3,862
We took the low interest rate for our last couple of cars. Bought in 2002 and 2009, I expected to do much better in the market than the interest charges. Heck, we probably came close to getting the first car for 25% of the sales price, counting what we made by investing the money we borrowed.

Not so sure it would be quite the same sure thing now, especially with the $2k cash back. If that's less than maybe 10% of the cost, I'd probably take the loan. But you never know. It's a one time deal, you'll either win or lose. If you have the opportunity to do something similar many more times, things will average out like they should. Otherwise you just have to go with the most likely outcome, cross your fingers, and not worry about it too much.
__________________

__________________
Animorph is offline   Reply With Quote
Old 04-20-2010, 03:41 PM   #3
Moderator
ziggy29's Avatar
 
Join Date: Oct 2005
Location: Texas
Posts: 15,612
Here's how I'd approach it strictly from the financial point of view. For sake of argument let's say the truck costs $25,000.

How much interest could you earn on an initial $25,000 deposit over the course of 5 years, putting the money into safe cash equivalents that would allow you to pull out the $417 a month needed to make the payments? Perhaps a CD ladder could work with a lot of it with $5000 of it "maturing" each year to make the next year's payments.

Unless the interest I could safely earn (no risk of principal loss) by taking the financing "beat" the $2,000 cash back by a considerable margin, I'd just pay cash and not have the debt hanging over me or the added complications of having another bill to pay.

If I could make (say) $3,500 in interest -- unlikely in this pathetic yield environment -- by financing it I'd finance it. If it were more like $2,300, that extra $300 for financing isn't really worth taking out a loan and having debt, not to me. And if less than $2,000, it's a no-brainer; pay cash all the way.

Anyone who has the ability to pay cash but takes 0% financing (I've done it before on a new HVAC system, there was no cash rebate option) should, IMO, *absolutely* "firewall" that money. It's spent. Know that and resist the temptation to spend it again. $25,000 of that (using my example) is already spent; you're just allowed to keep the "float" on it until you have to pay it back.

I didn't approach the "I despise debt" point of view which would say to just pay the cash and don't play with fire, but if you're extremely debt-averse, there's nothing wrong with making a (possibly) suboptimal financial decision of paying cash up front if it makes one feel more in control of their financial picture. (Then again, if you were one of those, you wouldn't need to ask this question...)
__________________
"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)

RIP to Reemy, my avatar dog (2003 - 9/16/2017)
ziggy29 is offline   Reply With Quote
Old 04-20-2010, 04:18 PM   #4
Thinks s/he gets paid by the post
Bikerdude's Avatar
 
Join Date: Jul 2006
Posts: 1,901
In my case the 25K would come from an IRA (all in one year) and would put me in a higher bracket (state & fed) so I would have to crunch some numbers.
__________________
“I guess I should warn you, if I turn out to be particularly clear, you've probably misunderstood what I've said” Alan Greenspan
Bikerdude is offline   Reply With Quote
Old 04-20-2010, 06:24 PM   #5
Thinks s/he gets paid by the post
MasterBlaster's Avatar
 
Join Date: Jun 2005
Posts: 4,359
Quote:
Originally Posted by sayhey24 View Post
Am I missing something here?
60 month at zero % or $2,000 cash back on a new truck to replace the 10 year old one that we have. I ASSUME that 0% is the way to go
and leave the cash in the bank/market wherever. I can't stand the thought of a payment........but 0% sounds good....any words of wisdom

Incentives go up and down. If this strikes you as a good deal then go for it. Many times the financing is a better deal than the rebate. However here are some things to consider...

If the truck is sold early or totaled in an accident/stolen etc. the rest of the financing discount will not be available.

ballpark the rebate versus financing as follows. Take the amount you'll be financing - say $20k for example, pick a bank interest rate that you could otherwise get - - maybe 6%. then multiple amount financed by the number of years financed by the interest rate and divide by 2 (this estimates the average balance of the loan over the finance term).

so for a 5 year loan at 6% you estimate the finance savings at...

$20K x 5 years x 0.06 /2.0 ==> ~ $3000 financing incentive

based on that I would say that the financing is a better deal than the straight ($2k) rebate.

If they limit the years of 0% financing then plug in your own numbers and recalculate
__________________
MasterBlaster is offline   Reply With Quote
Old 04-20-2010, 06:46 PM   #6
gone traveling
 
Join Date: May 2008
Posts: 3,864
Beat the car dealer down another 2K on the price , then take the 0% financing...

Put the 25K in an interest-bearing account and set the car payment up on auto-pay. That way you never have to write a check, the cash is still available if you need it for an emergency; you can always pay it off early if it bugs you.
__________________
Westernskies is offline   Reply With Quote
Old 04-20-2010, 06:54 PM   #7
Moderator Emeritus
Bestwifeever's Avatar
 
Join Date: Sep 2007
Posts: 16,375
I see Penfed has 3.99 percent for new car loans and Bank of America is at 3 percent
--you could take the $2,000 and arrange your own financing.
__________________
“Would you like an adventure now, or would you like to have your tea first?” J.M. Barrie, Peter Pan
Bestwifeever is offline   Reply With Quote
Old 04-20-2010, 07:35 PM   #8
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
dex's Avatar
 
Join Date: Oct 2003
Posts: 5,105
1 Glass of wine warning.

Assume $25,000 price for 60 month no interest

Sales tax 5% = 1250/25,000 or 1150/23000

$2,000 discount + Sales tax savings = 2,100 saving or a 8.4% savings on the 25000 base
cost

So the amount to beat by your investments is 2,100.
I'm too lazy to do the correct NPV analysis. But it looks as if - excluding income taxes - you need an interest rate of apx 3.5% to beat the discount. Again, I'm too lazy to do the work so let's say you are in the 20% tax bracket so the hurtle rate is 4.2% - then there is sate income taxes

You also have to know the amortization schedule being used. There is a method where all the interest is front loaded. So, if you the truck is totaled in year one you still might owe the full invoice cost because all your payments in that year went to interest. See rule of 78


Interest Rate

0.035



Years
5000 87.5 0.5
5000 262.5 1.5
5000 437.5 2.5
5000 612.5 3.5
5000 787.5 4.5

2187.5 Total Interest
The other factor is the loan term - the 25,000 loan might have a principal and interest rate that gets you to $2,5000
Rule Of 78
When paying off a loan, the repayments consist of two parts: the principal and the interest charge. The Rule of 78 weights earlier payments with more interest than later ones. If the loan is not terminated or prepaid early, the total interest paid between simple interest and the Rule of 78 will be equal. However, because the Rule of 78 weights the earlier payments with more interest than a simple interest method, paying off a loan early will result in the borrower paying more interest overall.


This method of allocating interest was commonplace in loans for consumer goods, such as automobiles. However, the U.S. government has outlawed the use of the Rule of 78 for loans longer than five years. This is largely because this method penalizes borrowers who pay off debts early.
__________________
Sometimes death is not as tragic as not knowing how to live. This man knew how to live--and how to make others glad they were living. - Jack Benny at Nat King Cole's funeral
dex is offline   Reply With Quote
Old 04-20-2010, 08:01 PM   #9
Thinks s/he gets paid by the post
MasterBlaster's Avatar
 
Join Date: Jun 2005
Posts: 4,359
dex:

The rebate comes off after sales taxes are paid. The value of the car is assede at the price before the reabte comes off.
__________________
MasterBlaster is offline   Reply With Quote
Old 04-20-2010, 08:39 PM   #10
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jun 2005
Posts: 8,618
We did a 3-year 0% car loan. Instead of moving money out of savings to pay cash, we re-arranged asset allocation to have the money in an IRA that eventually earned more than 6% tax-deferred over the course of the loan from 2006-2009. That was a few thousand dollars.

We did put the monthly loan payment on auto-billpay. We had enough monthly cash flow to make the payments, but we had to watch out to make sure the money was there since we did not make the payment from the money that was invested. It sure was nice when the last payment was made as we've never had a car loan before.

Would I do it again? Of course.
__________________
LOL! is offline   Reply With Quote
Old 04-21-2010, 01:22 PM   #11
Dryer sheet wannabe
 
Join Date: Apr 2010
Location: Nashville
Posts: 22
I just bought a Toyota Yaris (new). I generally don't "do" either new cars or car payments, but this is a cheap car, the MPGs are great, and they were offering incentives for the first time ever on this car. There are almost no used ones that cost much less (b/c the Yaris liftback has only been out a few years).

I ran the numbers on taking the $1K cash back and financing at 3% vs. 0% financing, and since I KNEW I would be paying the car off in 18 mos no matter what, I came out WAY better on the 3% financing w/ cash back. I will be spending only $230 or so on interest, so by taking the $1K I saved almost $800.

So figure it out that way. Definitely don't pay ANY car off in 60 mos, though!!! If you can't afford to pay it off in 2 years or less, get a cheaper car or don't finance!
__________________
pawsplus is offline   Reply With Quote
Old 04-21-2010, 01:29 PM   #12
Moderator
ziggy29's Avatar
 
Join Date: Oct 2005
Location: Texas
Posts: 15,612
Quote:
Originally Posted by pawsplus View Post
Definitely don't pay ANY car off in 60 mos, though!!! If you can't afford to pay it off in 2 years or less, get a cheaper car or don't finance!
I think this is generally good advice (though I might say 3 years is OK, but not much more). If you *need* a longer term than that in order to get "affordable" monthly payments, you're probably buying too much vehicle for your finances.

Having said that, if you get 0% financing AND have the cash to pay it off set aside in an interest-bearing account, I see no harm in going longer than 2-3 years. But again, the cash back offer may be a better deal when paid in full up front.
__________________
"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)

RIP to Reemy, my avatar dog (2003 - 9/16/2017)
ziggy29 is offline   Reply With Quote
Old 04-21-2010, 02:20 PM   #13
Recycles dryer sheets
 
Join Date: Sep 2008
Posts: 60
Last time I bought a car, the salesperson only focused on what the monthly payment would be and if I could afford that or not. This is how "most" people purchase cars. I informed him, I didn't care about monthly payments. I was only worried about what the price of the car would be. The monthly payments, if needed, would be what they were going to be. After we negotiated the overall price of the car, that's when I allowed him to discuss payment options.

It's my belief that a buyer can get a better deal on a car if you show the ability to pay cash. My concern is that if they know that a person will be using 0% financing that the dealer will not be so ready to cut the overall price of the car as much.
__________________
Uncle Drew is offline   Reply With Quote
Old 04-21-2010, 02:25 PM   #14
Dryer sheet wannabe
 
Join Date: Apr 2010
Location: Nashville
Posts: 22
Quote:
Originally Posted by Uncle Drew View Post
Last time I bought a car, the salesperson only focused on what the monthly payment would be and if I could afford that or not. This is how "most" people purchase cars. I informed him, I didn't care about monthly payments. I was only worried about what the price of the car would be. The monthly payments, if needed, would be what they were going to be. After we negotiated the overall price of the car, that's when I allowed him to discuss payment options.
Yup. This is what I did. I researched the car, went in knowing what my bottom line was, and refused to discuss either the payment or the potential trade-in until we agreed on the purchase price. It took me a WEEK to buy that damn car, LOL, and along the way they tried a bait-and-switch (which, after I complained to the Customer Service VP about sexist treatment, they were forced to honor, thereby ending up getting $800 LESS on Friday than I had been willing to pay on Monday!).

There are umpteen online calculators where you can figure out what your payment will be if you finance $X for X months at X interest rate, and even if you pay $X more a month. So you should KNOW what your payment will be b/f going in and refuse to discuss it.

I did feel, after I bought my car, that I should have gotten it for FREE for all the work I put in, LOL, but hey.
__________________
pawsplus is offline   Reply With Quote
Old 04-21-2010, 07:31 PM   #15
Thinks s/he gets paid by the post
Bikerdude's Avatar
 
Join Date: Jul 2006
Posts: 1,901
In the movie "Tin Men" Richard Dreyfus (an aluminum siding salesman) goes to buy a new caddy and the sales guy says "so, how much would you like to spend on this car"? Dreyfus answers "I don't want to spend anything, $0, so lets start there".
__________________

__________________
“I guess I should warn you, if I turn out to be particularly clear, you've probably misunderstood what I've said” Alan Greenspan
Bikerdude is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
6 months to go for ER at 41 Prale Hi, I am... 11 01-09-2008 08:26 PM
That's it. Two more months! huutrinon FIRE and Money 2 10-03-2007 08:32 PM
18 months to go DangerMouse Hi, I am... 7 01-13-2007 01:22 PM
Six months into ER Non sequitur Hi, I am... 9 02-17-2006 01:09 PM
3.25% for 15 months haha FIRE and Money 8 01-01-2005 03:43 PM

 

 
All times are GMT -6. The time now is 03:24 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.