Last post on Mar 21, 2009 at 6:50 PM
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#371 of 390 Re: Paying .75% interest??? [joesmith2]
Mar 12, 2008 (7:24 pm)
OK, lets do some basic math.
If you finance $20K for 48 months at current average rate of 6.8%, your total interest will be $2899. If you invest $20K into tax free municipal bonds at 3% annual return, you will make $2550 in interest in 48 months. So basically, the car loan will cost you only $379. However, you will have a 20K cushion that you can rely on if you loose your job. Also, if you adjust your budget to make $477 monthly payments to the bank, you can continue to make those payments to yourself after the car is paid off.
You have to remember that the simple loan interest is calculated on ever decreasing principal, while investment interest is calculated on ever increasing principal. Therefore, if the manufacturer is offering a subsidized rate, grab it, and invest your money.
In addition, if the manufacturer is offering 2.9%, independent dealer has nothing to do with it, and he won’t give you a discount if you offer to pay cash, he has no incentive to do so. Here is tip. If you are paying cash, let the SP and SM assume that you will be financing with them, you will get a better price. Dealers make money on financing; therefore, they are more likely to accept a lower price on the front end, if they think they will make up on financing.
Joe, I am almost a generation younger than you are, and I can buy any mass produced car with cash, I haven’t done that since ’92. It just doesn’t make sense.
#372 of 390 Re: Paying .75% interest??? [exb0]
Mar 12, 2008 (9:21 pm)
Let me say first I'm certainly not looking down on anyone. I've driven some real beaters over the years, and my 96 grand marquis isn't anything to be proud of.
Now for the basic math, my favorite subject! I calculate the total interest paid on the hypothetical loan (20,000, 4 years), to be 2,898.88, round it to 2,899. However, I think you made a typo on the interest you'll earn on those tax free bonds, I come up with 2,510.18, a difference of $388.70. Anyway, like you say, the loan costs about $400, and sure, its always good to have cash around for a rainy day. If you needed $5,000, how long would it take to get cash from those bonds? Would you pay a penalty? You sound like the kind of guy that keeps cash laying around just in case, like I do, so that's probably not an issue for you.
So would you really make payments for 4 years and keep those bonds? Even though it costs you $388? Why doesn't it make sense to save the $388?
When I started posting on this subject I was thinking about my nephew, I told him to pay cash for a car but he wanted a car that cost more than what he had. He told me he can make car payments, he just can't save money. I suspect your decision to make car payments is at least partly psychological, not just financial. Having saved that money, the thought of just handing it over kind of hurts don't you think?
#373 of 390 Re: Paying .75% interest??? [joesmith2]
Mar 12, 2008 (10:43 pm)
I come up with 2,510.18 …
It's a minor point but exb used monthly compounding for his tax free bonds calculation. I think ordinary bonds do not compound but those that do compound do so semiannually.
SUVs and Smart Shopper
#374 of 390 Re: Paying .75% interest??? [joesmith2]
Mar 13, 2008 (10:21 am)
Let me address the credit card at 1.9%, no fees. My credit card has no annual fees, and I get 1% back on all the purchases. The credit card business is tricky. Bill O'Reilly talked one time about a conversation he had with an exec at one of the major credit card companies. He asked him, how do you guys make money? The answer was, on the late fees. It's $40 a pop. Credit cards used to make money on the annual fee. Of course they make money on the discount they get from merchants. But that's not where the big money is. They used make it on the exorbitant interest rates. They'll look for some way to get you. It seems like everyone has their own version of a Visa and Mastercard, and they all make nice offers to get you to sign up. I'm not real sure why, but I know they have an angle. One thing I do quite often when I'm paying for something is pull out my visa, and ask "do you give a discount for cash"? Real often they do, and why shouldn't they, they're getting their money now, they know it won't bounce (like credit cards do sometimes), and it won't be discounted. Play their game if you want, just be aware they're not making that great offer as a public service.
Sooo... let's see... you are making arguments based on assumptions. You are assuming I pay late fees. I don't. You are assuming I use my card for things I could get for cheaper if I played some sort of bargaining game. I don't. Sure, the credit card companies can LOOK for some way to get me, but just because you have been "gotten" every time, does not mean everyone is.
I pointed out that one 1.9% card because we were talking about interest rates. But I don't use that card for regular purchases. I get 5% back on groceries with my Amex (no bargaining at the grocery store) and I get 5% back on my gas with my HESS mastercard (darned gas station attendants aren't in the mood for bargaining, either).
If I was buying a new car that offered 2.9% interest, I'd ask for a discount for cash. All they can do is say no. But why should they say no?
Well, let's see. Maybe because the dealer (you know, the company you are buying the car from) isn't lending you the money. They don't care if you come in with a sock full of pennies, a cashier's check, or a loan draft. If you get a car for invoice minus holdback minus incentives, well they ain't making a dime on the frontend as it is, so why in the world would they proceed to take a LOSS because you flash green in front of them? Answer: they wouldn't.
Simple fact is a person who has done their homework and uses financing is going to get the same sale price as the guy was has done his homework and has a briefcase full of cash. The only difference is, if that person using financing gets a fantastic rate and has the cash to earn interest on, he will make out better than briefcase guy.
If they want you to make your first months payment when you take delivery, that's a scam. You aren't borrowing the first month's payment, but they're charging you interest on it.
That's typically a lease point. I don't think I've ever seen "first month's" payment in regards to a sales contract. In reference to a lease, however, it only changes the end date of the contract. If you pay first month's, you only have 35 payments left on a 3-year lease, for instance. I have done it both ways and I think I prefer the 1 month up front. In the other instance, I have to make a payment on the day I turn the car back in. So I make a payment on a car I don't have anymore. That doesn't appeal to me.
How many people read all the fine print on the contract?
I do, and that's all that matters to me.
#375 of 390 Re: Paying .75% interest??? [dtownfb]
Mar 13, 2008 (10:22 am)
We all know paying cash is best.
Nope. I don't agree. Not in all cases, anyway.
#376 of 390 Re: Paying .75% interest??? [qbrozen]
by Kirstie@Edmunds HOST
Mar 13, 2008 (6:12 pm)
and this is not hard, even. If you can make more money on your cash than you are going to pay in interest, finance. If you can't, you shouldn't if you don't have to.
I am really bad at math, but this is rather easy.
Having said that, I can't pay cash in most cases, so I look to put the most cash down vs. the best interest rate I can get.
#377 of 390 Re: Paying .75% interest??? [kirstie_h]
Mar 15, 2008 (6:14 am)
Don't forget Kristie, you need to consider the tax you may have to pay on the interest you make on investments.
Back to the main topic of this thread, I don't think its really valid to think about what you spend to own a car in terms of what you make. If you can walk to work, you shouldn't spend as much as if you commute 50 miles each way. If you can get a job that pays more, but you'll have to commute farther, then that could justify spending a higher percentage of your income on your car.
I'm in the market for a replacement vehicle, which is why I got on this site. Over the next 3 years or so I believe gas will be over $4.00, perhaps $5.00. I also believe foreign cars will go up sharply in price because of the exchange rate, the dollar is dropping like a rock against other currencies.
I'm considering a Honda Fit, which I'd have to buy new because a used one would be over 90% the cost of a new one, based on what I've seen on the internet. On the other hand, a 2003 Mercury Grand Marquis LS can be had for $8,000, this car was over $25,000 new. I made a spreadsheet of all the factors, of course I have to guess how many miles I'll drive per year, what gas will cost, and what my average mileage will be. I figure 35mpg for the Honda, 23 for the Mercury. If I keep my next car 10 years, average 15,000 miles / year, and gas averages $4.50 / gallon, I come up with a total annual cost of $4,800 for the Honda, $5,400 for the Mercury. If gas averages $5.00 per gallon, my annual cost goes up to $5,000 per year for the Honda, $5,700 for the Mercury. Based on that, I'm leaning toward the Mercury, because (for me) its a much nicer car, its big, luxurious, and has a great ride.
Input from other forum members would be welcome, I'm here to learn!
#378 of 390 Re: Paying .75% interest??? [joesmith2]
Mar 18, 2008 (1:13 pm)
On the other hand, a 2003 Mercury Grand Marquis LS can be had for $8,000, this car was over $25,000 new.
Well, while that may have been MSRP, they never had a street price that high. My father-in-law has bought nothing but Grand Marquis for the past 20 years or so. Each time he has bought new and paid somewhere down in the mid teens for them. The one he just got a few months ago he got a GS with gold trim, chrome wheels (or are they gold, too, i forget), and cloth top (the family calls it the "Florida package") for about $15k. That's about $12k off, I believe.
#379 of 390 Re: Paying .75% interest??? [qbrozen]
Mar 18, 2008 (7:42 pm)
The LS is $5,000 more than the GS, and they have the $5000 cash back thing, so the LS has been 25,000 for a few years now. Don't know how you can get one for 15k new, but still, $8000 is pretty cheap for an LS thats 4-5 years old.
#380 of 390 Re: Paying .75% interest??? [joesmith2]
Mar 19, 2008 (11:41 am)
Don't know how you can get one for 15k new
Low demand and screamer ads. I dunno.
I have seen as high as $10k trunk money in the past, IIRC.