Cash vs. Financing

[lectoid]

Next month I'll be looking to trade my '11 328i for a '14 X5 with a third row.

Looking at CPO prices, I should have enough to pay in cash.

Now is it better to walk in there with a check book. Or finance it and pay it off after the first month (assuming no penalties for doing so).

Someone told me the dealership will likely cut more of the price off if they think they can make it up with finance percentage.

Thanks.

[dtronics]

In my limited experience, dealers prefer that you finance so they get a percentage from the bank. You'd think offering to buy it outright would give you more leverage but I've experienced the opposite. I'd do what you mentioned... finance it to get a better deal and then just pay it off right away.

[lectoid]

Would it be wise to let the sales/finance people know so they can do as much magic as they need to. Like give me a 20% rate to drop the price even further for example.

Plus when I financed my 328i, BMW paid the first payment, so that was nice.

[Kzang]

Originally Posted by dtronics

In my limited experience, dealers prefer that you finance so they get a percentage from the bank. You'd think offering to buy it outright would give you more leverage but I've experienced the opposite. I'd do what you mentioned... finance it to get a better deal and then just pay it off right away.

This is pretty much my experience as well.

[double_j]

Originally Posted by lectoid

Would it be wise to let the sales/finance people know so they can do as much magic as they need to. Like give me a 20% rate to drop the price even further for example.

Plus when I financed my 328i, BMW paid the first payment, so that was nice.

I wouldn't tell the dealer what you're planning. Since they get a share of the interest charged, I'm not sure if they'd actually make any money on a loan paid off right away.

Additionally, if the dealer is worried that they won't make money when you pay off your loan early, it might give them some incentive to put you into a loan with pre-computed interest (you pay the full interest amount regardless of when you pay off the loan) or some other kind of non-standard loan format to their benefit without your knowledge.

It might hurt your pride, but the safest way to play this one is to play it dumb. Negotiate like a hardass on the price of the car itself but don't question the initial rate that the dealer gives you for the financing arrangement (and tell them that you'd like as long a loan-term as possible with as little down as possible - perhaps up to 72 months with nothing down).

They'll peg you for a rube who's clueless about finances and is only focused on getting the absolute lowest price possible for the purchase (they see a lot of these people). Since they think they're going to make a killing off you on the interest spread, they'll be much more likely to concede the initial sales price.

[P1]

Paying cash won't work in your favor. If you are willing to finance, you're in a better position to negotiate a better deal. Just make sure there aren't any early payoff penalties, which there probably aren't.

[McWCgW]

Try this: tell them you just want the best price possible, and that you don't care about the payment as much but need it to be over 84 months. That way they can give you a sweet deal on the purchase price, but they will expect to make their money on the back-end by giving you a high interest rate. Then pay it off the next day.

It's basically the same thing shady car salesman do to less knowledgeable buyers, show them great purchase price with a great discount and a monthly car payment "you can afford", but it's because they charge a high rate over a long term.

[Flying Ace]

what's the total cost of finance though? (Interest and finance charges?). Read the disclosure and get back to us.

This is more of a cost of financing vs discount or a investment return exercise to me. You'll get a "deal" on list price, but I'm sure you give it mostly back (if not more) in interest and finance charges. Come on...they're not dumb. They think you are, but if you crunch the numbers, you'll know the correct solution.

Now if both scenarios equate to the same out of pocket cost, then it's a opportunity cost/investment returns exercise. But all the "smart" people who claim that's the main reason they finance..I'm betting actually rarely invest that money and get their estimated return. They just end up spending it on something else or let it sit in cash, eating up opportunity cost.

[PeanutButterJellyTime]

You also have to bring to present value the monthly payments by the discount rate (interest rate) and add it on to the down payment price to have a good comparison.

Now if you're an aggressive investor and obtain more than the interest rate in annual returns then finance. In this market it sure isn't hard to get 5+%/annum return.

[iconoclast]

Originally Posted by lectoid

Now is it better to walk in there with a check book. Or finance it and pay it off after the first month (assuming no penalties for doing so).

if you're exploring the two options i would like to give you another which you may find more suitable. get the best possible price on the vehicle for an outright purchase. before you agree to anything make a few phone calls to see what the rates are for "title loans" in your area from legitimate banks/credit unions (not titlemax or similar) probably 1.7-1.9% if you are top tier. if that is the case then you own the car outright and on the flipside if you want cash you may borrow up to 80% of the wholesale value of the vehicle using it as collateral while still driving it. if this makes sense for you then perhaps it is something follow through on down the road when you may need a sudden cash infusion and do not have to make the decision now.

Originally Posted by PeanutButterJellyTime

Now if you're an aggressive investor and obtain more than the interest rate in annual returns then finance. In this market it sure isn't hard to get 5+%/annum return.

you would have to be out of your mind to go aggressive at this point. especially for people in your region. canadian lenders just lost 40-70% of their stock value in the last 24hrs and the US default rates on CC and auto loans are increasing rapidly along with subprime mortgages spiking again but to top it off NEW retail brokerage accounts are at all time highs, higher than the top of the TMT bubble/craze. it would be wise to start looking for the exits now while the people are still dancing at the party not when the music stops and everyone leaves at the same time.

Originally Posted by Flying Ace

They just end up spending it on something else or let it sit in cash, eating up opportunity cost.

more often than not this is exactly the case and it winds up being another loan since "i have the cash in the bank" then you have more loans than cash and you're worse off than you were at square one.

[mnx5er]

I've bought way too many new cars and I never disclose how I will pay for the car until the price is settled. If I do finance, I bring in a number I already have from a lender and I make the dealers compete. I've never seen better prices if I finance.

Dealers are usually getting 10-25 basis points in profit from a loan - not very much at all.

The downfall of finance and payoff right away is the hit to your credit for the credit check and then the short term loan. Both can cost you a few points.

With rates being so low at times, it can make sense to finance and invest the cash elsewhere. Really depends on your personal situation.

[PeanutButterJellyTime]

I bet the OP did not expect this to turn into Finance and Economics 101. Lol.

DISCLOSURE: I'm still long on my aggressive holdings. Haha

[jiggz]

Originally Posted by mnx5er

I've bought way too many new cars and I never disclose how I will pay for the car until the price is settled. If I do finance, I bring in a number I already have from a lender and I make the dealers compete. I've never seen better prices if I finance.

Agree, this is how I do it too. Salesperson/dealer has no business knowing how you're going to pay until it's time to pay. The negotiation of the sale price is completely independent, at least it is when I buy vehicles. Only after a sale price is agreed upon will they find out how I'm paying.

[Flying Ace]

Originally Posted by PeanutButterJellyTime

You also have to bring to present value the monthly payments by the discount rate (interest rate) and add it on to the down payment price to have a good comparison.

Now if you're an aggressive investor and obtain more than the interest rate in annual returns then finance. In this market it sure isn't hard to get 5+%/annum return.

ehh... past returns aren't indicative of future results...but yes, I would say high quality investment grade corporate bonds are paying out close to 4%....so to eek out 5% (risk adjusted) is conceivable.

[Flying Ace]

Originally Posted by iconoclast

if you're exploring the two options i would like to give you another which you may find more suitable. get the best possible price on the vehicle for an outright purchase. before you agree to anything make a few phone calls to see what the rates are for "title loans" in your area from legitimate banks/credit unions (not titlemax or similar) probably 1.7-1.9% if you are top tier. if that is the case then you own the car outright and on the flipside if you want cash you may borrow up to 80% of the wholesale value of the vehicle using it as collateral while still driving it. if this makes sense for you then perhaps it is something follow through on down the road when you may need a sudden cash infusion and do not have to make the decision now.



you would have to be out of your mind to go aggressive at this point. especially for people in your region. canadian lenders just lost 40-70% of their stock value in the last 24hrs and the US default rates on CC and auto loans are increasing rapidly along with subprime mortgages spiking again but to top it off NEW retail brokerage accounts are at all time highs, higher than the top of the TMT bubble/craze. it would be wise to start looking for the exits now while the people are still dancing at the party not when the music stops and everyone leaves at the same time.




more often than not this is exactly the case and it winds up being another loan since "i have the cash in the bank" then you have more loans than cash and you're worse off than you were at square one.

at least in the US, there's a ton of retail money still on the sidelines. That with potential corporate tax reform, AND the fact we're technically in year 4 of the current bull market, I would say we have a bit to go. (FYI, many people measure cycles incorrectly at the lowest point, the cycle starts when from the lowest point it returned back to the prior highest point. The current cycle started in early 2013, but if you measure from trough, you would say we're in year 7 of the cycle.)

Also, the consensus for prudent money management is, don't borrow what you can't pay back tomorrow (on most consumer discretionary goods). Many of us are not disciplined to stash cash or even invest it when you can get a loan.

[turboawd]

with rates as low as they are, dealers dont really make a lot from finance kickbacks.

[Flying Ace]

Originally Posted by turboawd

with rates as low as they are, dealers dont really make a lot from finance kickbacks.

i believe dealers get single monetary payments not as a percentage of loan amount nor interest rate. So someone who finances a 228i or a Alpina B7 results in the same incentive. I talked to a person in the finance department before. They actually get incentives for clean paperwork, and speedy processing and selling extended warranty and things like that. That's why there's just 1 guy in the finance office at every dealership, and have you seen his desk? My god...like a fucking hurricane went through there....

Now, auto finance arms of manufacturers can add more incentives to dealers to get people to finance...

[iconoclast]

Originally Posted by Flying Ace

at least in the US, there's a ton of retail money still on the sidelines.

when joe six-pack enters the markets with the odd-lot orders or random buzzword purchases it's a sign of the top. i will never call a top or a pick a bottom but i believe in getting a large chunk of the middle because i will never lose money booking profits too soon. i may limit my upside but i mitigate risk much better. i sleep better knowing i left 3-5% on the table versus sitting on loss of 8-10% or worse if i didn't get filled. either way i think the OP may be getting annoyed that his thread is now about investment strategy and not about his purchase. let's get this train back on the track.

[boyce89976]

If you can pay it off with no penalties 30-60 days after the purchase, then finance it... money is cheap right now, and the dealer will cut you a better deal (marginally better).

[lectoid]

Wow, yea this thread did go off on a tangent.

Now my concern is do I finance a 45k truck and pay it off when I get the first payment bill. Or finance a better 55k truck and just have a few years of car payments.

No no, my plan was to be entirely debt free, so I don't want any payments.

[Kzang]

Originally Posted by lectoid

Wow, yea this thread did go off on a tangent.

Now my concern is do I finance a 45k truck and pay it off when I get the first payment bill. Or finance a better 55k truck and just have a few years of car payments.

No no, my plan was to be entirely debt free, so I don't want any payments.

What 45K truck are you getting from BMW?

[iconoclast]

BMW makes "trucks"?