(Update) Can a dealer only allow me finance or lease a Bronco?

[BroncoAZ]

If you have $50k in cash and you buy the Bronco outright, you pay $0 and make $0 each year.

If you have $50k in cash and you BORROW a separate $50k; you owe monthly payments on the loan and earn interest on your cash you invested. If you don't make MORE in interest than you PAY each month on the loan you took out, you are losing money each year.


No investment will pay you more on interest than you will owe in monthly payments on an auto loan for the same amount, $50k in this case.


What is wrong with my math?

You seem to be assuming one has $50K sitting in a savings account earning .01% interest, others are looking at that cash being invested in something making more than the interest rate on the loan. You also seem to be saying that the investment would need to earn enough to cover the principal and interest to break even, but that is incorrect. The investment only needs to earn more than the interest on the loan to break even, you still have your cash.

In my case I’m paying 1.99% for 60 months on my $38,200 loan. The principal and interest payment on my loan is $669 per month, the total interest paid on the entire loan is $1936 if I take it to 60 months. If I invest that same $38,200 in anything earning more than 1.99% I’ll be money ahead after 60 months compared to paying cash up front. I’ll have the >$1936 in interest and my initial $38,200 in cash while having paid $40,164 total on the loan.

I agree with the others suggesting to take their financing and pay it off after the paperwork clears. My folks recently purchased a new vehicle, there was an extra $1000 incentive from Toyota if they financed in house. The rate wasn’t great, 4% in a market where they could get 2%. The plan was to have my folks do the deal and refinance it at 2.29% within the first month, they took their required minimum distribution and just paid it off.

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[Wanted33]

If it’s a choice of you not getting a bronco unless you finance with them but I would finance with them. Then pay it off with the finance company in the first 30 days. Assuming that there’s no early payment penalty.

I believe if it’s paid off right away the dealer does not get the kickback from the finance company.

Bingo. Play their game, and pay it off. But, do not tell them you're doing this. Make it a big surprise.

 

[MnLakeBum]

will be 3.5-4% in Canada now.

Strange that Canada would be so much higher. My credit union is currently at 2.49% for a 48 month and 2.74% for a 60 month loan.

 

[2050Broncoorsomething]

You're comparing interest income against interest and principal payment.

Thats why you need to see what the interest is going to cost you in total. In my case my Bronco is going to cost me 3700 in interest which is spread over 5 years. Or 740 a year.

What the poster is saying is that if you can make more than $750 a year it is better to invest than tie up assets on a depreciating liability.

On compounding interest with 50,000 it isnt unreasonable to have close to 70,000 after 5 years compared to having 0 and a paid off car. Either way its paid off. Cheap money lent is always the play when you are pulling in 6-10% returns.

 

[Bronco cat]

Policy is not the law, they're bluffing to try and shake you down. Pay cash, F-them!

Except they don’t have to sell the car to you.

 

[Silver-Bolt]

Finance $100.

 

[Pootypoot]

Finance it. Pay it off and than laugh that they get no bonus from the financing.

 

[Pootypoot]

That makes no sense and sounds like a bad idea.

If you borrow money, you have to make a payment every month. Assuming its ~$50k, thats only a few dozen dollars a month interest in any account you'll earn, and maybe a few hundred per year total, either way it will be less than your monthly payment back. Am i missing something?

Yes. 3% interest rates on 50K vs 10% interest rate returns on 50K. Historically you’ll make 7% return on that over 6-7 years.

 

[JohnnyBronco]

Tell them you are bringing your own financing - a cashier's check from a credit union or drawn on a home equity credit line (which you pay off the next day or on the way home)

If the balk at you securing financing from a different bank than they offer invite your local television news crew to the loan signing at the stealership. Great human interest story

 

[TripleB]

Paid cash at my dealer no problem

 

[JohnnyBronco]

ONly if you walk in with actual cash-cash and

Was this the stated reason?

Only if you walk in with actual cash and count out 100 100's. But it is not you that is reported by the bank but the dealer. Say the weekly total before the dealer makes a deposit exceeds $10,000 from any and all sources, the bank reports the dealer, not you. They certainly deposit more than $10k at a time on a regular basis. If the dealer is hesitant to accept cold hard cash then they are probably engaging in money laundering

 

[Johnny Mo]

I would like to pay full at picking up but dealer told me they can only finance or lease it. Says it’s dealer policy. Is that something that a dealer can do?

Generally in the US a private business can do whatever they like - as long as it is disclosed - check with your equivalent Department of Consumer Affairs. Here in NY parking garages can charge more money for certain SUVs that meet a height and length criteria - but in many garages the height part is irrelevant and the S600 mercedes that takes up just as much floor space doesn't get charged the extra fee - but because they disclose it you get hit with it. Cash deals don't make money, there's also the risk of money laundering. I love the idea that someone else posted put 100% down or 99% - there's more than 1 way to win the game.

edit - and when I say certain height SUVs I'm talking like Ford Explorer size SUVs - nothing crazy big.

 

[Roll Sound]

Finance and pay it off the next day... But they are saying it, as they make good money on the finance with the banks.

That costs money. Loans have fees and even 1% loan costs a bunch to pay off.

 

[Drex]

It's just a math problem. If you invest 50k and earn even 6%...that's 3k per year. The loan will cost half that or less. Over 5 years, you'd be 5-10k ahead. And you can always pay it off any time.

You are assuming a couple things and forgetting some others. First the nature of an amortized loan means you are loading interest heavy at the start. In your $50K example at say 4% over five years, you will end up paying down principal by $9K or so, however you will pay $1800 in interest, an effective rate of damn close to 20% for the first year for 9 grand of your money (you pay interest on the lions share of the $50K, so if you have to pay off the remaining balance for some reason (like selling it), you would have paid interest on nearly all of it at an effective rate far in excess of 6% (and I know you are itching to argue about me choosing 4% instead of 3%, it is due to the Fed already announcing they will increase the rate this month, so likely even higher in the real world


stolen from some bank auto loan site;

Because auto loans are secured, they tend to come with lower interest rates than unsecured loan options like personal loans. As of Dec. 22, 2021, the average APRs according to a Bankrate study are the following.

New car

• 36-month term: 3.84 percent.
• 48-month term: 3.87 percent.
• 60-month term: 3.86 percent.
• 72-month term: 3.64 percent.

)

It is not until around year four of the loan that you would start to claw back some of the interest lost on the loan in investment increases. Selling before then means you paid more interest already than you would have made to that point. Taxes are obviously going to vary by person, State, income, and so forth, however as a rough guess, as dropping $50K into an investment vehicle with 6% returns means it is not in a tax deferred situation (over the limits for 401(k) plus Roth/Traditional IRA, even above age 50). While it would be possible to maybe get it all invested that way, it would displace the money already going into those things. (someone with $50K in cash is likely investing in their retirement substantially already), so with money being fungible, the 6% investment will have taxes paid on it with a rate between 15-30% (depending on if you hold it more than a year and personal tax differences) on the gains

So to make your math work you would have to keep the loan/car until maturation, 5 years, you would end up with a 2% (yes, very rough numbers and simplification) APR before taxes, with a 4% rate and a 6% gain. Oh yes...taxes; at the low end of 15%, you lose 0.9% of that 6%, so down to about 5% real gain (assuming you mean 6% compounded in your statement).

So 1% advantage, you have to keep the loan for the full five years to get that advantage. Anything less and you may actually go negative with the interest heavy payments up front.

You lose the ability to sell (or it gets totaled) before year three if you want to stay ahead of the game. You are at the mercy of the markets, if your assumption of the equivalent of 6% over five years is incorrect, like the market drops in year 4 due to the Fed acting or a war breaking out, or whatever plague sweeps the World that end up with disrupting the economy, affects your investments, you could lose any and all of the $50K, You could also make a lot more in five years. Historically you would do better in most five year periods, so maybe not a bad bet. The problem is that inflation is your enemy, we are currently at about 7.5% annual on that, While it increases the dollars you can get for selling that shiny new rig as used if needed, it needs to be taken into account when deciding on loan vs investing. Your loan will cost you less in real purchasing power in times of high inflation, so if you can get a 4% loan in extended high inflation times, it is a huge positive for getting the loan.

It boils down to risk tolerance for people and is very individual. Zero unknown risk in a loan. 100% risk on investing and future tax considerations. Could be a very good gamble financially, but it is a gamble. Guy looking to retire in two years might not willing to invest in anything but low risk bond funds, no way he gets even 2% gains, young woman, long investing timelines, different risk tolerance.

I will point out that we are arguably in a worse economic position as a while then in the late 1970's where the market was dead for 10 years (inflation was nearrly as bad as it is now, 15% house loans and so forth.) It can happen again, might not, I don't know, neither does anyone else, we are living in highly volatile times as far as investing goes. Increased risk.

Point is, it is not a math problem, it is an individual risk assessment in uncertain times and there is no hard and fast (or easy) purely mathematical solution in a one size fits all kind of way.

 

[EBG]

"I say we take off, and then nuke the site from orbit. It's the only way to be sure."

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