What would you do?

[Rothman]

I bought a new truck yesterday, when going thru the details of the purchase I asked why the $500 rebate I saw online wasn't listed. They explained since I was paying cash I didn't qualify, however if I financed at least $9,500 of the purchase I could get the rebate. Looking at the offer, 60 months at 1.89%, payments of $166.06 per month, with a total finance charge over 5 years of $463.60. Also there is no penalty for prepayment, I can payoff the entire amount at the end of this month. Given I get $500 immediately I elected to finance and in my mind either scenario keeping the contract over 60 months or paying off immediately were superior to my initial plan to just pay cash. I now find myself conflicted, if I were evaluating this as a business proposition I think the right answer is to keep the payments and invest my $9,500, but my current strong desire to minimize my monthly expenses as I look to FIRE in 3 years makes me lean heavily towards writing a payoff check this month. So what would you do:

1) would you have financed the $9,500 to get the $500?
2) would you keep the payment schedule or payoff early?
And how do you decide

And yes I recognize many would not buy a new truck

 

[braumeister]

Some (like me) are just philosophically averse to debt of any kind.
I would have done just what you did, and pay it off in the first month.

 

[Gumby]

Whether I paid the loan off in one month or 60, I would have financed to get the rebate. The only reason I would decline is if I wanted to borrow or refinance a mortgage in the near future, as I would have more outstanding debt when they evaluated my credit (not that $9500 would be that much of problem)

As to whether I would keep the loan or pay it off now, my decision would be driven by what alternative investments are available, my tax bracket now and in the future, and my assumptions about future inflation.

Paying the loan now is equivalent to buying a risk free 5 year bond having an after tax return of 1.89%. If inflation over the next five years exceeds 1.89%, you would be earning a negative real return.

Now lets look at keeping the loan and investing the funds. You will take some risk, of course. And, if you are in the 25% marginal tax bracket, you would need to earn a nominal rate of 2.52% on your investment over those 5 years to break even. One advantage I see in this situation is that provides you with a better ability to respond to inflation, by moving the invested funds to different debt instruments as interest rates rise, or to choose equities.

Edit to add: I made a similar decision when I took a 1.99% PenFed home equity loan 18 months ago instead of simply paying off my mortgage outright.

2nd edit to add: I have assumed adequate cash flow to make the monthly payments

 

[pb4uski]

....So what would you do:

1) would you have financed the $9,500 to get the $500?
2) would you keep the payment schedule or payoff early?
And how do you decide

And yes I recognize many would not buy a new truck

I probably would have financed the whole truck as I would think that over 5 years I could invest the cash I would have used and earn better than 1.89%.

I had a similar situation on my last vehicle (except the interest rate was not as attractive) and I financed to get the rebate and then paid the loan of a couple months later.

 

[Theduckguru]

I would forego the new vehicle and invest the money. Seriously, I take the $500 and pay off the loan.

 

[Bestwifeever]

I know they do it, but why don't the car companies just give the rebate to anyone buying the car, whether financing or paying in cash, bit coins, or magic beans? Don't the dealers want you buying the car? I always suspect the price of the car is adjusted to reflect the rebate or lack of it.

 

[pb4uski]

I know they do it, but why don't the car companies just give the rebate to anyone buying the car, whether financing or paying in cash, bit coins, or magic beans? Don't the dealers want you buying the car? I always suspect the price of the car is adjusted to reflect the rebate or lack of it.

The incentive is more to take the financing than to buy the car. They hope that you finance it with them rather than elsewhere and they get interest and they hope that you miss some payments so they get to nail you with other fees.

 

[Theduckguru]

I know they do it, but why don't the car companies just give the rebate to anyone buying the car, whether financing or paying in cash, bit coins, or magic beans? Don't the dealers want you buying the car? I always suspect the price of the car is adjusted to reflect the rebate or lack of it.

Walk into a car lot, and what does the saleman ask you? "how much payment are you looking at?"

Not only do dealers want to sell you the car for the most they can, they have a goal of selling you a bunch of high profit stuff that many would not buy paying cash. Its easier to achieve that goal when hiding the cost over 5 years within the amortization.

 

[daylatedollarshort]

I would take the loan at 1.89%, get the $500, not pay it off and try to make a higher rate of return on something like GE stock, opening and closing savings accounts with high value sign up bonuses, or Penfed 3% CDs.

In the past when the loan rates were higher and we didn't think we could get more from investing the money, we have taken a loan and paid it off right away to get the rebate.

 

[Bestwifeever]

The incentive is more to take the financing than to buy the car. They hope that you finance it with them rather than elsewhere and they get interest and they hope that you miss some payments so they get to nail you with other fees.

I get that, of course, but it is really just a game for the cash buyer to get the loan and immediately pay it off. And not all rebates are tied to financing. When we bought our last car the deal was 1 percent interest or a rebate for cash. They tried to talk us into the financing--maybe in this case the dealer was kicking in for the rebate.

 

[daylatedollarshort]

1.89% is pretty cheap money and the probability is that investing rates will rise over the course of the loan. If not, the loan could always be paid off. There isn't a lot of downside risk to taking the loan, plus the chance of making $500 minimum in rebate money.

I always try to earn a few hundred to a few thousand dollars extra each year on assorted rebate, savings coupons, sign up bonuses, etc.

I have had a good year so far and am probably at $5K for the past 12 months, so for sure I would add another $500 in rebate money if I had the chance. I just look at what am I making per hour of work after tax.

 

[H2ODude]

I faced the same thing when I bought my truck ~2 years ago. Went ahead and financed it, and paid it off three months later. I told the dealer finance person I would pay it off ASAP and they requested I wait the three months as it wouldn't affect them if I did that. Seemed reasonable, so I waited and paid it off. Even at nearly zero interest I just don't like payments of any kind.

 

[pb4uski]

I get that, of course, but it is really just a game for the cash buyer to get the loan and immediately pay it off. And not all rebates are tied to financing. When we bought our last car the deal was 1 percent interest or a rebate for cash. They tried to talk us into the financing--maybe in this case the dealer was kicking in for the rebate.

In my case, there were other rebates for buying the car, plus an additional rebate for financing it with he manufacturer's financing arm. So for me it was really just a game, and easy rebate once I was comfortable that there were not prepayment penalties if I paid the loan off early. It was as close to a free lunch that it gets.

I agree that were the rebate choice is low interest financing OR a cash rebate that the decision is more complicated - in those cases I would lean to the cash unless the low rate was really low.

 

[Mr. Paul]

I don't do payments but making $500 for being $9500 in debt 30 days I could handle.

 

[F4mandolin]

It's a debt....pay it off. Yeah...waiting the month sounds like the smarter thing to do. But....I wish the car folks would just charge one price and hold to it. I am NOT a lover of negotiating. When I bought my Subaru I did it online (lived in the UK) and wanted it waiting for me when I got off the plane here in the US. I had negotiated for Weather Tech floor mats. I wasn't paying attention and I saw that they were in a wrapper in the car. Wasn't till later I noticed they weren't Weather Tech...they were Subaru ones which aren't as good. Kind of feel like I should have my wallet in my front pocket (and zipped up) when dealing with these people.

 

[W2R]

Some (like me) are just philosophically averse to debt of any kind.
I would have done just what you did, and pay it off in the first month.

Me too, but in my case I am so averse to it that I would have taken the hit instead of the loan. Not that that is advisable, but that is what I would have done. I would have dealt with it before coming to an agreement on price, though, and would have asked for an additional $500 off in my negotiations.

 

[Rothman]

Yes to clarify I did have to take the loan of at least $9,500 to get the $500, and the rebate is from car maker finance group so dealer has no choice and is indifferent to me paying it off immediately, which is what I still think I'll do. Not the finance choice I'd make for my company but I can't stand debt, it's even hard for me to resist paying off my mortgage but the IRS keeps paying me every year to resist my urge.

 

[MooreBonds]

Not only do dealers want to sell you the car for the most they can, they have a goal of selling you a bunch of high profit stuff that many would not buy paying cash. Its easier to achieve that goal when hiding the cost over 5 years within the amortization.

I bought my first car in 2009. They offered 0% financing for 36 months, so it was a no-brainer to take it. Also, they refused to negotiate any differently on the car's price whether I paid in cash or financed it.

However, after they agreed on the price and sent me to the 'processing desk'....THAT'S when they hit you up with every single possible add-on, ranging from $300 for some Rain-X application on your windshield to the extended warranty ("You can simply roll it into the price of the car and pay it off over 36 months! At 0% interest!").

To the average consumer who doesn't even blink while shelling out $5 for a cup of coffee or $15 for a daily lunch out, hearing that something costs "only" $10/month or $30/month sounds like chump change, and they're far more likely to pay for it than if they were presented with the total cost of $350 or $1,200.

 

[Ready]

I don't like debt, but I too would finance the deal for a month to get the $500 rebate.

Ironically, I have a 1.99% auto loan with PenFed, and as much as I want to just pay it off to get rid of it, I also just recently opened a CD with PenFed to earn 3% interest. And since the CD is "risk free", it makes little sense to take money out of a 3% guaranteed investment to pay off a 1.99% loan.

And yet, I'm sure by next year I will get around to paying it off, because I just don't like have monthly payments to deal with.

Ignoring the investment principle of how best to deploy funds, we really are not talking about big dollars here. So these discussions end up being more philosophical than practical.

 

[Rothman]

I don't like debt, but I too would finance the deal for a month to get the $500 rebate. Ironically, I have a 1.99% auto loan with PenFed, and as much as I want to just pay it off to get rid of it, I also just recently opened a CD with PenFed to earn 3% interest. And since the CD is "risk free", it makes little sense to take money out of a 3% guaranteed investment to pay off a 1.99% loan. And yet, I'm sure by next year I will get around to paying it off, because I just don't like have monthly payments to deal with. Ignoring the investment principle of how best to deploy funds, we really are not talking about big dollars here. So these discussions end up being more philosophical than practical.

That's probably the way I should look at it, if I got a 3% CD I'd make less than $50 per year, $4 per month on the money, even at 4% it's less than $100 per year, or like $8 per month. I'd rather be debt free. I do think I was right to take the $500 for my effort and now should move on. Thanks all

 

[donheff]

Interesting how I react differently to different amounts of debt. I paid off both mortgages but when I bought DD a car for college graduation I took a 0% finance option in lieu of a rebate. In any event, I would start the finance package and get the rebate.

 

[Walt34]

I just went through a similar scenario. I went through Consumer Reports Online car buying service (free if you're already a member) they contact some car dealers for a target price who agree to match it.

The closest dealer is not a participant but has a good reputation otherwise so I presented them with CR's target which they would match if I financed through them. Like you I was going to pay cash for the car and there is no prepayment penalty. So I took the financing at 1.9%, I'll make one payment in January and then pay off the loan in February.

Works for me.

 

[rbmrtn]

I did similar back in '06, the incentives were better. Got $1500 rebate for financing through their credit arm. I told them I was paying in full at the first payment, but they said 95% of the people they signed up never do that.

The catch I have seen the 0% and low rate offerings is that you can take it instead of the rebates/discounts, you don't get both.