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Why do people think 0% interest is “free money”

Discussion in 'Off-Topic Discussion' started by Shamrock92, Sep 13, 2021.

  1. Sep 13, 2021 at 10:07 PM
    #31
    DVCNick

    DVCNick New Member

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    I didn't follow the convoluted story in the OP but with the purchase price so different, there might be a good argument to paying cash.

    With the stupid low interest rates today, I'll keep my equity in the market making money, and I'll finance every dollar they will give me at 1-3 percent. Just the inflation is likely to be more than that. It is indeed free money. Equity tied up in a car is just sitting there depreciating. And of course, the market gains have been tremendous the last few years.

    It is common for the best price on a new car to be had if you use the dealership offered financing. (Pre Rona, etc) In that case, usually their interest rate sucks as they are getting a large kickback that is coming from that big interest rate. Take the low purchase price and crappy loan, and refinance immediately. That is what I did with my 19 Corvette GS.

    Literal "Zero percent" doesn't really exist... The dealer in that case has disguised the interest somehow, likely passing it along to the customer in a higher purchase price and is prepaying it behind the scenes.

    Always know the best actual interest rate you can get outside of the dealer as a good reference for what the actual interest is under the hood in whatever deal the dealer is presenting.
     
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  2. Sep 14, 2021 at 12:40 AM
    #32
    ColoradoTJ

    ColoradoTJ Certified tow LEO Staff Member

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    These topics always seem to really bring out the Dave Ramsey in people...lol. Don't get me wrong, I already follow most of what he says long before even paying any attention to him. Seemed like common sense to me.
     
  3. Sep 14, 2021 at 12:46 AM
    #33
    ersg6

    ersg6 New Member

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    I didn't read the other replies, but at 0%, on a product you need, you always finance instead of buying cash. Hell, even on smaller interest rates you finance instead of cash. You invest that cash and it makes more on the return than the interest would cost. Financing isn't bad if done right.
     
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  4. Sep 14, 2021 at 1:25 AM
    #34
    GIN•OKUMA

    GIN•OKUMA Can’t get to SSEM from there. RGBA1

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    Don’t forget to pay your taxes.
     
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  5. Sep 14, 2021 at 6:49 AM
    #35
    Bakershack

    Bakershack Critical of Noncritical Thinkers

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    NOW I see it as common sense, but my parents knew nothing about financial responsibility so I had to learn it the hard way. I never got fully onboard with Dave Ramsey in all the details, and he would never approve of some of the games I play, but I agree with him in general. I did follow his debt snowball strategy to pay off my debts when I was pretty deeply in debt. But I use credit cards for pretty much everything I can, paying the full balance off every month, so I can get the bennies. He would not like that.

    According to him, you should never buy new until you are a millionaire with $500k in the bank. If everyone followed that, pretty much every car manufacturer would go out of business!
     
  6. Sep 14, 2021 at 6:53 AM
    #36
    ColoradoTJ

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    I look at Dave as a suggestion. More than one way to get a goal accomplished.
     
  7. Sep 14, 2021 at 6:59 AM
    #37
    DVCNick

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    Dave Ramsey is good for people that are totally clueless, irresponsible, and have no self control when it comes to money. If you simply can't control your spending and don't have the discipline to save, you are better off with no debt, this is true.

    Once you have some self control and understand what an interest rate is, you can graduate to using debt as a tool to have nicer things AND make more money than you would living the "debt free lifestyle".
    In my opinion he's a one trick pony, a bit of a broken record, and I would say at least half the population would do better not sticking strictly to what he preaches, but be that as it may, he's certainly built and audience and done very well for himself and helped many people I'm sure.
     
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  8. Sep 14, 2021 at 7:46 AM
    #38
    Squeaky

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    ^bingo.
     
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  9. Sep 14, 2021 at 8:08 AM
    #39
    Shamrock92

    Shamrock92 [OP] New Member

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    To those who appear you read only the title and don’t read the entire post - RE READ THE LAST FULL PARAGRAPH!

    At no point did I say 0% loans or debt are a bad thing - I have debt and assets - there needs to be balance.

    My point is simply PEOPLE THINK 0% MEANS FREE. It does not - it means you are paying more and then getting an incentive of an extension of time to pay.

    My favorite ploy in auto is exactly the line quotes in this thread “all your giving up is the rebate” - ok - but a. How much did you save vs paying > 3% at a credit union and more importantly how much did you give up buying brand x over y ?

    So I buy a new Ram at 0% vs a Toyota at 3% - Ram cost 72k - Toyota cost 55k…but Ram let’s me pay 1k a month for 72 months…vs Toyota that wants to charge me 3%. People stupidly think they are “saving” by buying a Ram. Even when the principle is closer and the payments equal - there are more factors to be considered.

    I never said don’t spend your money as you like - nor did I say it’s a stupid thing to buy new in all cases. But when used is available and the general equivalent of new (remember my initial post was on equipment and not cars - in the equipment world you look primarily at hours/condition vs model year…so a 2015 with 1k hours is worth roughly the same as a 2020 with similar hours and a tad tougher condition). Yet some people will pay 35-50% more for new - vs paying cash for used that would fit their needs just as well…..just to get that “free” interest.
     
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  10. Sep 14, 2021 at 8:16 AM
    #40
    Shamrock92

    Shamrock92 [OP] New Member

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    And again - I understand the thought of “I’ll buy in credit and invest my cash and make money” - but do these people not understand the simple principle of risk=reward ??

    To gain a reward in a completely pure financial environment- there must be risk of an equal amount.

    My stock portfolio is up 51% YOY - hey it’s great…but at the same time I could be looking at an equal chance of a 51% loss next year. It’s gambling. Gambling is fine in small percentages of your income - but anyone gambling away more than a percent or 2 per f their income is wasting money long term. I mean if you make 50k a year - who REASONABLY thinks walking into a casino and laying 5 grand on the blackjack table is a smart move?
     
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  11. Sep 14, 2021 at 8:21 AM
    #41
    Filthyphil

    Filthyphil Lions Not Sheep

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    Because delayed gratification is not in the American Vocabulary any longer.
     
  12. Sep 14, 2021 at 8:22 AM
    #42
    Shamrock92

    Shamrock92 [OP] New Member

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    Depends on many things and would assume.

    Reliable transportation is in my opinion always a good investment in your future.

    But there becomes a point where you can spend money wiser.

    Is it better to spend 20k on a new Civic and pay 3% interest - or 20k on a new Ford Focus at 0% ? Both small cars - both cost the same - but in 5 years - what do you think cost less to own and commands more?
     
  13. Sep 14, 2021 at 8:22 AM
    #43
    DVCNick

    DVCNick New Member

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    Smart investing is not gambling.
    Are there risk of short term losses, yes.
    Is there a certainty of long term gains, yes.
     
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  14. Sep 14, 2021 at 8:28 AM
    #44
    The Californian

    The Californian Good Vibes Only

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    The problem is that for decades, there has been a complete focus on teaching math topics like the quadratic formula, or Pythagorean theorem, which a vast majority of the population will never use once they finish school; yet there has been a complete lack of teaching students math topics that ARE valuable to a vast majority of the population, like taxes, loans, and basic fund management.
     
    Last edited: Sep 14, 2021
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  15. Sep 14, 2021 at 8:34 AM
    #45
    Nic146

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    As a 21 year old with little real world financial experience, reading through this is interesting to hear some new trains of thought for me…money, debt, and investment is such a complicated and overwhelming thing to understand…

    Edit: Before I get ripped a new one like tends to happen- I own my truck out right, have no college debt, and good chunk of change tucked away. I’m not a total idiot…I’m just learning.
     
  16. Sep 14, 2021 at 8:51 AM
    #46
    The Californian

    The Californian Good Vibes Only

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    Just to make it more confusing, if you’re 21, with no debt - you’re not really building a deep credit history.
     
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  17. Sep 14, 2021 at 8:55 AM
    #47
    dittothat

    dittothat New Member

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    Good on you, kid. Keep it up.
    And we’re all learning.
    Remember, health is #1. Everything else falls after
     
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  18. Sep 14, 2021 at 8:55 AM
    #48
    dittothat

    dittothat New Member

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    Or maybe he pays his bills every month and zeros out..

    Edit: or maybe his parents piggybacked him and he has an 825+ credit score..

    you don’t necessarily need to be in debt to build credit
     
  19. Sep 14, 2021 at 8:56 AM
    #49
    Nic146

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    Thus why I just got a new credit card to start building…

    They really aughta teach this stuff in school.
     
  20. Sep 14, 2021 at 8:56 AM
    #50
    GIN•OKUMA

    GIN•OKUMA Can’t get to SSEM from there. RGBA1

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    or the prices of new vehicles wouldn’t be $70k right now. Supply and demand. If no one was buying them on credit they wouldn’t be able to charge that much.
    Considering 72-84 month loans are “standard” now and car manufactures are attempting to lobby with banks to get them to approve 120 month auto loans. I don’t see the prices going down any time soon. Unless we collectively stop purchasing new vehicles at astronomical prices.
    A few years ago (2019) Egyptians boycotted new cars for that reason “let it rust” movement and it took almost a year before the prices started going the other direction. I remember reading that the average price of a new vehicle was over $70k usd and that was for the likes of a Corolla.
     
  21. Sep 14, 2021 at 8:57 AM
    #51
    des2mtn

    des2mtn Third Member

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    A secured credit card through my credit union was a good way to start when I was that age.
     
  22. Sep 14, 2021 at 8:59 AM
    #52
    Nic146

    Nic146 New Member

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    Man that woulda been sweet if they did.
     
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  23. Sep 14, 2021 at 9:07 AM
    #53
    GIN•OKUMA

    GIN•OKUMA Can’t get to SSEM from there. RGBA1

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    At 18 I purchased a few hundred dollars of 24k gold jewelry from a big chain store on their credit. That jewelry is worth more today than when I purchased it. Started to build my credit with that.
     
  24. Sep 14, 2021 at 9:09 AM
    #54
    DVCNick

    DVCNick New Member

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    Really, having multiple lines of credit will build up your score faster.
    That can be two or three credit cards that you pay off in full each month.
    This will build up your credit score and history without paying a dime in interest, and also collecting the CC rewards.

    CC interest is astronomical and you should avoid carrying a CC balance forward at almost any cost.
     
  25. Sep 14, 2021 at 9:11 AM
    #55
    glowblue

    glowblue From time to time

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    The flawed thinking is that vehicles are an “investment”, it’s really a depreciating asset (unless it’s a Tundra!).

    Don’t think of buying a car as an “investment”, if anything it’s a losing investment, the value of which decreases with time.
     
  26. Sep 14, 2021 at 9:42 AM
    #56
    jpod

    jpod its Finally here

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    For normal consumers, yes. As a depreciating asset, your cost of ownership includes the portion of that assets life used up each year. Math on consumer vehicles is always bad...

    The OP said "equipment" which leans towards the idea of a business purchase (just a guess, maybe not.) In which case, cost is only one factor. ROI is what you're looking for, not just FV/NPV. If your "equipment" is for a business, you figure out how much return you're going to make on the purchase and work back from there on cost of the asset, cost of capital, etc. ...and yes, easier said than done when there isn't a direct link between cash flows...

    As for the 0%, that is added back in on price. Nobody is going to give you squat for free. 0% can be better/equal than incentives when you finance most or all of the purchase price. Usually incentives are better if you are only financing a small fraction. Because they're usually made to wash or profit the dealer/manufacturer for the average consumer (who finances most or all.) In the past, I've been able to talk them down below their incentive rate if you still finance the residual with the dealer at their normal non-subsidized rate (provided it's near enough to the level of my line of credit - and again, depending on the differential rate and the amount/time financed.)
     
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  27. Sep 14, 2021 at 10:01 AM
    #57
    Cpl_Punishment

    Cpl_Punishment Young men never die.

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    I spent $25k on a Kia with a good reliability rating that runs on regular rather than spending $35k on a VW with a poor reliability rating that runs on premium. :p

    I think the Civic would have been about $30k.
     
  28. Sep 14, 2021 at 10:15 AM
    #58
    ColoradoTJ

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    Off to a fantastic start. Keep it up, invest in your future, retire early.
     
  29. Sep 14, 2021 at 10:26 AM
    #59
    The Californian

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    To make things even more confusing, most dealerships don't even care about credit scores anymore. When I bought my Tundra they just wanted proof of income, never even checked my score.

    To make things even more confusing, mortgage companies care a lot about credit scores.
     
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  30. Sep 14, 2021 at 10:29 AM
    #60
    The Californian

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    To make things even more confusing, I used to have like four credit cards - I paid them all off, and canceled three of them since I only really needed one for emergencies. Then my credit score dropped significantly because I had canceled my oldest credit card. So now I have an American Express that I spend about $10 on per year just to keep it open to keep an old card active.
     
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