A frequent topic seen on this site and many other sites, blogs, and forums are the merits of using very low-interest financing for various things. The attraction is obvious. Not only do you not have to have the cash up front, but even if you do, surely you can do better investing than 0%, and if you borrow at 0% and earn at anything better than 0%, then you come out ahead. Leverage works. That's a mathematical fact. What isn't a fact, however, is that borrowing at 0% (or similar) is a good idea for you.
I'm certainly not guilt-free in this respect. Not only did I drag my mortgage out for a couple of years longer than we needed to (and came out ahead doing so) but we also pay our taxes using a credit card (for a mere 0.13% arbitrage, some float, and convenience) and have used 0% credit card deals to fund a Roth IRA in the past. But we don't really do it anymore. There are a number of reasons for that, and I think outlining them will promote a great discussion in the comments section to this common question.
You Spend More With Credit
First, let's hit the elephant in the room. The fact of the matter is that the vast majority of people who take advantage of financing offers, including financing at below-inflation rates, are people who don't have the money to buy whatever it is they're financing with cash. The financing allows them to buy more or buy earlier than they otherwise would. This is the main reason these offers exist.
These companies, whether they're auto dealers, mortgage companies, or banks aren't losing money on these deals in aggregate. So this leaves you, deciding whether to use your $20K in the bank for your new car or finance it at 0%, sitting there asking yourself if you are spending money you wouldn't otherwise spend without this deal. The answer most of the time for most people is going to be yes. Any time you convince yourself that you can resist behavioral finance pressures that others cannot, a healthy dose of humility should probably be injected into the thought process. Remember that mortgage we hadn't paid off while we were meanwhile buying a wakeboat with cash? In reality, we were buying that wakeboat on credit. The credit extended by the mortgage company. We weren't investing the difference and earning better than 1.6% (the after-tax rate on our mortgage). We were spending it. Maybe you're resistant to that tendency and maybe drug company advertising doesn't cause you to prescribe the advertised drugs more often, but it's unlikely according to all objective data on the subject.
0% Isn't 0%
Next, it's important to realize that 0% isn't 0%. A typical “0% financing” deal on a new car is really only a 0% financing deal for the best of the best. You know, 800+ credit scores etc. Maybe that's you and maybe it isn't, but it's critical to realize that the vast majority of people who go in there to get that 0% deal come out with 1%, 2%, or even 5% financing, not 0% financing. And by then they're emotionally attached to the car and are going to buy it even without the 0% deal. In fact, the financing desk is the last stop in that dealership after everything else is done. It's hard to walk away after investing several hours into that new car you can already envision in your driveway.
It's more fun to surf behind when it's paid for, and now that the mortgage is gone, it really is paid for.
In addition, most of the time (and perhaps not every time, but most of the time) that 0% deal is offered at the expense of something else. Typically with a car it's that the overall price is higher, i.e. you get a bigger discount with cash than with financing, but it could be something else you could wring out of the dealer like free oil changes for a year or something. There are no free lunches.
It Doesn't Usually Move The Needle
These little “arbitrage opportunities” are generally just that, “little.” So you borrow $5K at 0% and invest it for a year at 5%. You made $250. That's maybe 1-2 hours of pay as a doctor. Better than a kick in the teeth? Sure. But how much time and effort did you spend researching that, lining it up, and servicing it for a year? Subtract that from $250 and there's probably not much left. Same thing if you borrow $20K for a car at 2% and then earn 4% after-tax on that for a few years. Maybe you get $1000 after-tax out of the five-year arrangement. They all seem like wise hacks until you actually quantify them. Then they look like clipping coupons.
It's like my tax bill arbitrage. So say I pay $50K as an estimated tax payment. I pay a 1.87% fee and then get 2% back on the credit card. 0.13% of $50K is $65. Even when you multiply it by 4 for the entire year, it's only an hour's worth of gross pay for a typical emergency doc. Even the 6 weeks of float (and the saved stamp) doesn't add much more benefit. If it wasn't more convenient to pay by credit card than by mail, I probably wouldn't bother. It's just not going to make any sort of measurable difference in our financial situation.
It Distracts You From What Matters
I think the biggest problem with using cheap financing for the typical reader of this site is that it is distracting. You're using your limited time and energy on something that doesn't make a big difference instead of elsewhere. If you're spending your time hunting down 0% credit cards or $100 brokerage transfer deals, maybe you'd be better off starting a side business, streamlining your practice, negotiating your contract, rebalancing your portfolio, carefully examining your asset allocation etc. And that's just the financial possibilities.
Minimizing the amount of time you spend on finances is a worthy goal in and of itself. Go spend that time on your partner, your kids, your hobbies, your volunteer service, or your practice. I've had a few critics (rightfully) point out the reason we're in such a great financial position is that we started WCI, LLC. That's exactly my point. We didn't spend all that time juggling credit card travel offers but started a business instead that has treated us (and millions of readers) much better.
It's A Poor Man's (Woman's) Game
One of the best parts of being wealthy is not having to wring out every single little dollar from your life that you can. You can afford to “waste” money (perhaps better stated as “use money to lubricate your life.”) You don't take out a new HELOC every time your home appreciates $100K because you don't have to in order to reach your financial goals. You don't have to use a 0% credit card to fund your Roth IRA before the deadline. You don't have to talk to the finance desk at the dealership, so you don't.
That sort of stuff helps me to feel rich, since there have definitely been times in my life when I did have to do that sort of stuff. Even if you find that you have to do stuff like this now, look forward to a time when, because of the wise financial decisions you've made in the past, you no longer have to do so. Being debt-free is just as much a status symbol as having a wakeboat in the driveway, and it's one we've chosen to have.
What do you think? Do you use 0-2% financing for purchases when available? Why or why not? Comment below!
I’m trying to enforce (an ever-increasing as I become more wealthy) hourly rate at which I am willing to spend my time to make money. It is a very imperfect science, but as a rule-of-thumb, it works pretty well.
For truly wealthy people who have all the money they’ll ever need, it does not matter one way or another and they can entertain themselves by “doing the math” and trying to solve the “riddle”/”puzzle”/”mystery”. To those of us not truly wealthy but with enough to just pay cash for that car, just go ahead and pay off the mortgage, whatever, many of us feel that having some reserve of money in savings/investments “just in case” is worth whatever we are supposedly losing by earning 1.5% on cash while we hold onto the 2.875% mortgage or whatever numbers you want to substitute in that “equation”. Some of us who have been through some tough financial times can afford the payments on a car loan or mortgage loan and we’d rather pay those payments while having savings that make us comfortable knowing we’ve got reserves in case something bad happens. For many of us, something bad has happened. Sometimes it has happened to both spouses individually or together or even repeatedly and now that we finally have some money, we want to hang onto it in investments, safe savings, whatever. That factor never gets mentioned in these discussions. For the truly wealthy, it doesn’t matter, particularly if you’ve never actually had to eat rice and beans night after night. As I mentioned before, to WCI’s horror, I’ve got the money in the bank to pay off my student loans but prefer to drag them out for three to four more years just to keep that money “just in case” because I’ve been there where the just in case is a reality.
As for the comment about being debt free as a status symbol, I agree with that. We were able to pay off our mortgage but we have left over enough savings to feel safe and comfortable, and have an equal amount in 401-K and 403-B. I still have student loans but you better believe I feel like I have a higher status than all those other guys who still have a mortgage. I own my house. It’s mine. All mine. To me, that;s status. Since i’m a pretty fanatically private person, I don’t tell anyone that we’ve paid off our mortgage, well, not anyone except you guys… But seriously, I don’t tell anyone. My spouse and I just enjoy our status all on our own. When my student loans are paid off, I’ll really feel like I’ve got an even higher status, but I feel pretty status-advantaged already.
During the mortgage bust I pointed out to my spouse who pretends to have no scruples that we might want to let them foreclose on our home if it was now worth only 50% our purchase price, just we’d have to buy our next home before we got foreclosed and might have to pay cash for any homes after that. So there’s that idea if one has minimal qualms over being a deadbeat.
I also have the feeling- having sold 2 homes- that the realtors factor in your mortgage remaining when price of home is negotiated. IE if I still owed $300K I’d be certain to get $300K plus, whereas if I only owe $100K I might get under $300K. Every home sale seems like I end up owing a few thousand despite having paid the 15 or 30 year mortgage for several years. Hopefully now we’ve paid off this house we will leave the table with some big bank if we ever sell.
Jim, how about you become the first person in the world to provide negative percent financing on your new course? Instead of $499, you would offer the course for negative 5 percent financing. A student would pay 39.50 per month for 12 months instead of $499 all at once. That is, by taking the special negative finance deal, they pay $474.05 for a $499 course. You are paying them to finance their purchase because financing is a poor option and they need to be compensated for that poor choice as a matter of honesty on your part. The $499 is a decoy and the goal is to get people to choose the best option which is being paid to finance their purchase. A med student would win because she would save money, and you would win because the sale of more courses (hopefully) would outweigh the decrease in revenue from each sale. Also, you could get credit for the first person in the world to offer negative percent financing. (OK, silly idea, but it is late after a long day). As a thought experiment, would the audience and you pay all at once for this deal, or choose the negative interest rate deal? What I am getting at here is where is the tipping point in the spectrum. Negative one percent, negative .5 percent? What would it take for the naysayers above to accept a monthly plan versus an all at once purchase.
I think Teachable does permit people to make payments for a course, but I’m not going to do that, no matter what the interest rate!
I used to make 10-50$ on these deals as a resident. Looking back, it was totally not worth the time and hassle.
WCI:
You can splurge on the Malibu for your next boat!
You don’t have to get the 25LSV, but a 21MLX won’t be too extravagant when it’s time for your next one.
I learned to wakeboard, surf, and run the slalom course behind an anesthesiologist’s 20VTX when in high school (in some ways that boat is the genesis of how I ended up on a site like this one). Like him you’ll always have great stories of early boats and their breakdowns when people compliment your “fancy boat.” (He and his brother had a $800 boat in medical school.)
Sure I could, but then I’d feel badly beating it up. There’s a reason we can’t have nice things. Do you know what I do with that boat? 🙂
We’ll consider it again if we ever upgrade though. I just couldn’t justify spending another $40K for features I didn’t really want and certainly didn’t need. But no way am I going to a 21 footer. I’m very happy I paid for a larger boat.
Five years ago I was planning to buy a $40K car with cash. Then, after the deal had been fully negotiated, I discovered the manufacturer was offering honest $35K 0.9% financing. I went for it, figuring I could invest the cash and make some extra $$$. I’m disciplined enough not to spend the extra cash I had, but in retrospect it didn’t really “move the needle”, so if the same situation comes up again, I’ll just keep my life simple and pay cash.
I bought a car about 6months ago. New car, low 40s pricing. I was prepared to pay cash. However by taking the 1% financing deal there’s an F2D incentive to knock a a few grand off the price. The sales guy told me that while i can turn around and pay cash right away after the finanicng they’d prefer I at least make 3 payments so they get the F2D incentive.
The other thing that I don’t see mentioned here is liquidity. While i have an emergency fund and a “slush” fund for stuff like buying a car or going on vacation. Buying something on zero percent just keeps your cash on hand a little higher.
2 years ago we got a new car for my husband. We financed at 1.49% despite being able to pay cash if we had saved, however I was still paying off my 6.8% student loans at the time (didn’t know about refinancing) so we figured it made sense to funnel all extra cash into the student loans rather than the car. Yes, we could have picked a cheaper car but we plan on keeping it at least 10 years and we didn’t go too crazy (Highlander)
If those were the only choices, you made the right choice. But they aren’t, so (maybe) you didn’t. Let’s use your same analogy but blow it up with bigger numbers to make the point.
Imagine you had $100K in student loans at 6.8%. You were offered a mortgage at 1.49% on a $5 Million house. Since 1.49% is less than 6.8%, you think you came out ahead. In reality, you’re in dire straits trying to make that mortgage payment and because of that payment you can’t pay anything extra on the student loans to pay them off quickly.
True, everything in moderation. In my case we had enough cash flow even with the car payment that the loans were still gone within 3 years of finishing residency
So in the big picture, you won, and that’s the only picture that matters.
What’s always missing from the 0% financing proponents is the risk factor.
Borrowing money, owing a creditor and having someone else OWN the item (e.g. that’s how the car title works) always carries more risk than owning it outright. I’m sure everyone here is perfectly confident they will never miss a payment, never make a late payment, never leverage the same cash across multiple 0% financing deals, never spend more than they would have otherwise.
Yet somehow the financing companies still make money on those 0% loans in the long run.
Car buying and store cards. When you really need the 0% financing, it’s not there. When it’s very enticing, there is usually a way for the manufacturer or retailer to benefit from your “good deal”. Check out this article where the major points are really hit: http://www.changeyourcredit.com/?page=Is-Zero-Percent-Financing-Actually-a-Good-Deal
I only ever buy a new car if I get 0% interest.
I do like for my wife to have a new car. I feel better about her being on the road. I drive a 15 year old Prius.
I am debt-free (no car payment, either). I’ve got quite a lot of cash reserves. I could buy a new car outright. I’d rather not. I’d rather keep my cash and string it out.
I would not buy that new car if I weren’t getting 0% (which is a point made above). Where I disagree, I guess, is that I don’t necessarily think that’s a bad thing. Because I do want that new car and I simply don’t want to be rid of that cash. And I certainly am not going to pay somebody to use their money in the form of interest. But I’ll use it for free.
I just bought a car at 0%, have the money in my savings account. Every month I set up an automatic transfer from my savings account to into my checking to pay for the cost of it. If I was 10 years into my career as an attending I might not do this, but at this point in my life it makes sense. I signed up for savings accounts in medical school for the sign up bonuses, it made sense then not now. I’m sure when I was 10 and my parents wanted to give me 5 dollars for doing an extra chore I was thrilled. Doesn’t mean I’m going to be raking leaves in my spare time now that I have an MD.
Excellent demonstration of one point of this article. The other point is that looking back, none of that little stuff I did mattered much, even back then.
I financed a Scag zero turn lawn mower for 4 years at 0% financing. It’s got a 61″ deck and the dealer delivered it to my house. The quality of the cut is superior to my previous cub cadet, consumer grade model. I probably could have bought a used one from a landscaper, but then I’d be sitting in someone else’s buttsweat stained seat. After a week of jacking prostates out of men, I do enjoy the relaxing 90 minutes of getting some beautiful lines on my lawn.
90 minutes with a 61″ deck? That’s not a lawn, it’s a farm. You’re mowing the South 40!
But your comment doesn’t address the main subject of this post. Talk about your reason for financing it instead of paying cash. Was it because you didn’t have the money for a new one and were concerned that you couldn’t disinfect the seat adequately nor replace the seat on a pre-owned one? 🙂
I think I financed it because the 0% offer allowed me to save the $9500 in cash the mower cost. I had the cash, but I kind of saw the payment as just a simple way to keep cash in my savings. It was kind of like I could pay a landscaper $400/month to do a lousy job and be cranky about it, or I spend $200/month payment and do it myself. Now, if I tear up the grass, it’s my fault and I don’t have to have an awkward convo with some landscaper.
I see the point of the initial blog post, but I didn’t really spend a lot of time hunting down this deal. I went to the one Scag dealer in my area and the dealer says he has 0% financing. Why not?!
Anyway, I’d be interested how many docs actually mow their own yards. Buying a $9500 lawn mower that I put 40-50 hours on the motor per year will probably last me a lifetime. I’d otherwise be paying $2600 per year for lousy landscaping services. In 4 years with those costs diverted to paying off a mower, I get a Scag and 1.5 hours per week of alone time!
So what is your savings paying, 1%? So you’re making 1%*$9500= $95 per year arbitraging this lawn mower. Seems like it wouldn’t move the needle much for a urologist, no?
The why not is because it distracts you from the financial moves that really matter and constrains your cash flow all for a benefit of just $95 a year, decreasing over time.
Comparing it to a totally different service (lawn care) feels like justification to me. You should be comparing it to paying cash, not a lawn service.
Fine,
You win! :). The savings aren’t all that much. But, it’s just so hard to not go for free financing when it’s available for the exact item I want.
That being said I don’t get lured into buying a car that I don’t really want just because one company is offering 0% vs the car that I want has a higher rate. On the most recent minivan purchase for the family, I used the dealer financing as it gave me an extra $500 or $750 off the car. I ended up paying off the loan after three months so the dealer would get to keep their cash. Anyway, it’s again the discussion of what’s the value in not having to talk to the finance guy for 30 minutes.
It’s not about winning. Remember I did the same thing for many years. It’s just about sharing some stuff I learned along the way.
30 minutes with the finance guy is painful. I’m going to try to buy my next car without even entering the dealership if I can!
Funnily enough I took out a small 0% finance loan last month to buy a cell phone. I could have easily afforded it cash but I did it just to help me build credit.
The leverage has its uses but can definitely be a trap in the wrong hands!
Stay safE!
Josh
Is there something you need credit for that your current credit score isn’t good enough for?
I plan to buy a Full-size luxury SUV as our family has grown to 5, and the long trips (we live in a rural area with a drive of 3 hours to the airport) are a little tight with the vehicles we currently have. I would like to have a 3rd-row seat and extra cargo space especially when we are parents are traveling with us with extra cargo space.
I have been investing in large Apartments (both as GP and LP) and have had opportunities to invest in both the equity side and subordinated loans. The subordinated loan opportunity that is currently available is at 12% paid quarterly for four years.
I called our local credit union (which traditionally has given physicians in my hospital an excellent rate), and they are offering 1.99% with 20% down for a 72-month car loan.
We have the cash to buy the car but are thinking of investing the money in the subordinated loan and getting a car note from the credit union (or any better car loan ). Could someone let me know if I am missing something by investing the money at 12% interest and paying 2% t for the car note? When the subordinate principal is paid out in year 4 I plan to pay off the balance of the car note. When I made the calculation, I would be getting 9K per year on interest payment and paying slightly north of 12 K per year on the car note.
I know that these investment opportunities need research and due diligence (as WCI says it can be distracting from what matters), but Apartment investing is my passion and I would source these opportunities anyways for myself and colleagues even without consideration of investing in them for the purpose of purchasing a car
Why are you conflating the two decisions? They’re really not related to one another.
Decide what you want to drive and if you can afford to drive it, then buy it.
Decide how much leverage you want to use in your investing/financial life and then go out and get it in the most advantageous way possible.
Maybe that’s this car and this debt, but it seems unlikely.
But don’t start thinking about investing with leverage only when you start going car shopping. That’s just justifying.