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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 9:48 AM
    #1
    Shamrock92

    Shamrock92 [OP] New Member

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    What is it about these 0% interest deals that make ordinarily intelligent adults act like complete morons.

    Todays particular moron involved an equipment purchase - but it very commonly occurs in truck sales too,

    The buyer post bragging how they spent 28k on a new piece of equipment that sells for around 17k used in good condition - got 7 years 0% interest and calculated with inflation it only cost them like “20k in today’s dollars”. Logic being - if I plug in the numbers at 7% interest - I would have to put 20k into an investment at 7 years to have 27k at the end of term - so it’s like they sold it to me for 20k cash.

    How are people so financially illiterate?!? No genius - putting 20k into a vault and coming back 84 months later to find 27k is very different than buying a machine on an installment plan with no interest charged for 84 payments.

    First - you are “chipping away” at the base from payment 1 - by the time year 5 rolls around - your 70% paid off of the principle (or roughly what the used machine would have cost you cash today) but have 2 more years of installments left.

    You then get the “inflation” argument brought up - “the dollar will be worth less in 5 years, prices on used will go up as new cost more” - while this MIGHT be correct - it is unlikely that a. Inflation on EVERYTHING continues above 5% over a 5 year period and B. It’s very possible prices go DOWN if inflation overheats and tanks the economy.

    Finally - the nice little add in. To get the 0% - you have to buy asset protection insurance the price - 4K - divided equally over the payments. Now keep in mind most people could skip this and use their own insurance of paying cash (at no added cost) and the insurance only pays THE BALANCE OF THE NOTE…so if your on payment 83 and it gets stolen - your getting a tiny return - hell, it’s a sucker bet - but year 3 in it really stinks.

    Don’t get me wrong - 0% offers make sense to some people/some situations and are a good way to get what you want now and budget - but they aren’t free money people ! No one is handing out hundred dollar bills without the need to pay them back for months without an agenda. Be it getting your info to resell/market towards, over inflated prices for the product or just outright scamming you - there is ALWAYS A PRICE.

    Rant over - just tired of people using twisted logic to explain their “genius”.
     
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  2. Sep 13, 2021 at 10:18 AM
    #2
    Wynnded

    Wynnded What MPG...

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    They did poorly in math class...
     
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  3. Sep 13, 2021 at 10:27 AM
    #3
    Cpl_Punishment

    Cpl_Punishment Mother-Loving Member

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    Let's say I just graduated from university and don't have an extra $20k sitting in the bank but I want to buy a new car to commute to my new job. Should I finance that purchase at 0% or at some higher interest rate, say 2.5% or 5%? Which is going to cost me more? Or does it depend on other factors that you don't know?
     
  4. Sep 13, 2021 at 10:30 AM
    #4
    War Machine

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    Never heard it called it free money, but when you buy a vehicle with a zero % interest rate you generally only give up the manufacturer’s rebates. In my experience, those rebates have always been less than what the interest would have been.

    Guess I’m not following what you’re getting at here.
     
  5. Sep 13, 2021 at 10:45 AM
    #5
    Jernik

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    I'm guessing the original argument was, if he'd bought a good used piece at $17k and paid interest, figuring inflation impact on all the $ spent in interest, somehow he came out ahead by using "free" money to buy a new piece at $28k?

    I don't follow how he came up with the "$20k in todays dollars" bit though. Which I think is the crux of OP's rant - it doesn't make sense.
     
  6. Sep 13, 2021 at 10:59 AM
    #6
    Saltyhero13

    Saltyhero13 Throbbing Member

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    Ok Dave Ramsey, step away from the keyboard.

    Not all debt is bad. If the person can get their money to work for them at 7% its a no-brainer. The only "dumb" part is buying a depreciating asset with the loan unless the asset itself can offset its own cost or yield profit.
     
    Last edited: Sep 14, 2021
  7. Sep 13, 2021 at 11:02 AM
    #7
    TundraTed

    TundraTed New Member

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    If you don’t know how to use the NPV function on your BA II + calculator (or Excel) you shouldn’t be financing anything.
     
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  8. Sep 13, 2021 at 11:12 AM
    #8
    Bakershack

    Bakershack Critical of Noncritical Thinkers

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    You're right on some points, but not necessarily all.

    "The buyer post bragging how they spent 28k on a new piece of equipment that sells for around 17k used in good condition - got 7 years 0% interest and calculated with inflation it only cost them like “20k in today’s dollars”. Logic being - if I plug in the numbers at 7% interest - I would have to put 20k into an investment at 7 years to have 27k at the end of term - so it’s like they sold it to me for 20k cash."
    In this case, the $17k used is by far the best option. And the argument used for FV (Future Value of money) is based on unrealistic numbers in this case. There is a real calculation for this used in business and in engineering economics that is based on real numbers.
    FV = PV * (1 + r)^n where
    FV = Future Value
    PV = Present Value
    r = Annual interest rate
    n = Number of periods of interest held

    It is also wise to consider the risk. Where can you invest for a risk-free 7% today? You're lucky to get 1% unless you add significant risk, which means your balance may go DOWN.

    In this case, r=0 so FV = PV, so it seems like 0% financing is a good deal. But my question would be, what is the CASH price? I doubt seriously that the cash price would be the same as 0% financing. And the used option in this case seems MUCH more attractive with just the information presented above. The MAIN reason I bought my Tundra new was that the used prices were so high for late model Tundras with low mileage, it didn't make much, if any difference to buy new. I also wanted the Apple CarPlay, which was added to the 2020's.

    IF the cash price is exactly the same, and you don't have a compelling used option, then 0% financing works well. I have used it for various things through the years when it was advantageous to me. But again, I'd bet that the cash price would be less in this case, AND there is a reasonable used option.
     
  9. Sep 13, 2021 at 11:20 AM
    #9
    Saltyhero13

    Saltyhero13 Throbbing Member

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    @Bakershack Excellent write up. Thanks for taking the time writing it up.
     
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  10. Sep 13, 2021 at 11:21 AM
    #10
    dittothat

    dittothat New Member

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    I don’t know a whole lot about money, but 0% interest makes sense to me. If I can purchase a vehicle (or equipment) at that rate over another higher rate, then why not. I can take the excess cash and invest it (hopefully making a profit or at least moving up with inflation). Granted the guy is dumb for bragging about his purchase. It’s the same with companies leasing vehicles.. sometimes it just makes more sense. It’d be awesome to sit down with you to pick your brain.. I just can’t seem to follow it.
     
  11. Sep 13, 2021 at 11:32 AM
    #11
    AZBoatHauler

    AZBoatHauler ASCM#3 Desert Dweller

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    I’ll throw this out there -
    Generally speaking, people who have been living beyond their means or debt-heavy have been cashing in like crazy in this economic climate. People the majority would agree were “financially irresponsible” are becoming millionaires using other peoples money. It is currently the “spenders” that are winning, not the “savers”.
    :crapstorm:
     
    Last edited: Sep 13, 2021
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  12. Sep 13, 2021 at 11:40 AM
    #12
    Baem1035

    Baem1035 New Member

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    This is why people get into debt and don’t understand how money works. They will hear things like “no interest” and think they are saving money. This isn’t always the case but people listen to these salesmen without doing their homework and get screwed. These people are in the business to make money, they’re not your friends. People are just too lazy or illiterate to numbers they don’t know any better. Zero interest can be a swat deal, but doin your homework and comparing numbers on maybe something used that’s cheaper with a lower interest rate may be better financially.
     
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  13. Sep 13, 2021 at 11:43 AM
    #13
    akmerle

    akmerle New Member

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    Very nice write up, and the “reasonable used option” becomes less attractive given that used vehicle interest rates are higher.
     
  14. Sep 13, 2021 at 12:03 PM
    #14
    BubbaW

    BubbaW Saw it right off

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    0% interest after reading "todays particular moron" :pccoffee:
     
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  15. Sep 13, 2021 at 12:05 PM
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    knoxville36

    knoxville36 New Member

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    Dealers much prefer you to finance. They do not get any interest kicked back to them, but they get an extra $100 to $300 for financing through the chosen bank.

    They get guaranteed funding coming from a bank with next day wires. I know there is a small chance, but sometimes these "cash" buyers have checks that bounce, etc......

    Whether they get a wire the next day or a check written for purchase price, it does not change their cost and how much they make on a sale.
     
  16. Sep 13, 2021 at 12:09 PM
    #16
    BuckWallace

    BuckWallace Ball don't lie.

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    When people refer to "free money", the assumption is that you can buy something on credit, then take the cash and invest it somewhere and earn more money with it while paying little or no interest on the borrowed funds. The idea is that if you want to buy a car that costs $20k and you have cash to pay for it, but you can also get it at 0% interest, then it makes more sense to borrow the money and invest the cash. We get that vehicles are depreciating items, but if you're buying one, it's going to depreciate whether you pay cash or borrow the money. Now, you usually also get into the fact that if you take 0% you're likely giving up some sort of rebate (with Toyota, anyway) which also factors into the math.

    Anyway, that's where the "free money" comes from.
     
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  17. Sep 13, 2021 at 12:12 PM
    #17
    RusPro21

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    2021 Pro!! Nitto’s 285/70/18, Tyger Blades steps.
    Here is a senario back in 18 Black Friday weekend the 19’s C7 Z06 last year for the manual and rear wheel drive. Chevy never ran 0% financing on corvettes. Wife talked me in to moving up from my 2004 Z06. So local dealer had Z06 on the show room floor 4 miles on it. Discounted heavily. But the 0% was for only 3 years. Guess what. I have 3 payments left on my Z and the best part is if I decided to sell it it worth more now than what I paid. But they ain’t going to happen. The last year just like my 21 tundra Pro. That is the only time I ever did 0% financing.
     
  18. Sep 13, 2021 at 12:23 PM
    #18
    omgboost

    omgboost The Accountant

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    If you have $28k cash in the bank account, would you spend it all on the asset purchase or invest it in the market and earn much more than the pennies on the dollar most banks pay. Most people may not like the idea of investing in the stock market but usually when people say they can earn so and so in the market, they are tracking an index fund. So find an index fund like the S&P 500 or total stock market and it’s easy to earn 7% on your $28k. Sure, some years may go down but some years may go up by a lot so we are just taking historical averages here.

    So i would take the 0% interest and make sure I am on time with the payments and invest the $28k in the stock market and earn on that money. Is it free money? Not really, it’s more like free to borrow money. I wouldn’t spend $28k on something I don’t need but if I need to and they offer 0% apr, I will take that deal in a heartbeat.
     
  19. Sep 13, 2021 at 1:34 PM
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    ScenicRoute

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    Thought this was tundra forum? Not I’m smarter than someone else and here’s why…:monocle:
     
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  20. Sep 13, 2021 at 1:38 PM
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    AzureNightmare

    AzureNightmare ASCM#1 Douchebag formerly known as 50 Buck

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    It is a Tundra forum... with an off topic section. You know, for non Tundra stuff. There's stuff about other vehicles, home improvement, life insurance, just BSing, all types of stuff. Explore with an open mind and you might like it. If you don't, you can always just stay in the Tundra sections too. :thumbsup:
     
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  21. Sep 13, 2021 at 1:45 PM
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    DrZoidberg

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    Your arguments seems more buy used vs new rather than 0%.
     
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  22. Sep 13, 2021 at 2:42 PM
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    Darkness

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    Other than my house I haven't financed anything since 2008. That said if you finance with zero interest that's nice, if it means giving up some incentives that's okay. Zero interest definitely is not free money, its just not costing you extra money on your purchase.

    My buddy keeps telling me to buy a guitar on a 48 month plan at "zero interest" from a certain well known music store. It is tempting, but I read the fine print and you're not allowed to pay it off early, must make exact payments monthly, and the cost is slightly more (about 1%). When I bought my guitar cash he asked me what I did that for. I told him the 1% didn't bother me, I just don't like payments.
     
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  23. Sep 13, 2021 at 3:00 PM
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    Tchase

    Tchase MostlyLurk

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    Exactly and my dumbass had to have the the finance gal prove to me I would be money ahead taking the rebate and a 3% loan from BECU.... Both my wife and I are well over 800 and yes if you don't have to pay interest it's like free money sorta....


    PS I did put 10k down.
     
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  24. Sep 13, 2021 at 3:20 PM
    #24
    Hbjeff

    Hbjeff New Member

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    Most people think 0% loans are loss for the dealership/store

    in reality 0% loans allow most people to spend far more money than they should be spending

    they aren’t losing with 0% loans, otherwise they wouldn’t be offered
     
    Last edited: Sep 13, 2021
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  25. Sep 13, 2021 at 4:21 PM
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    ScenicRoute

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    that’s true. I guess I just take enough satisfaction in knowing I’m right or thinking I’m right rather than write a dissertation on why I’m right and you’re wrong and here’s why!

    Party on.

    the above was a generalization. Not an I’m right and you’re wrong rebuttal to your post.
     
    Last edited: Sep 13, 2021
  26. Sep 13, 2021 at 5:25 PM
    #26
    Bakershack

    Bakershack Critical of Noncritical Thinkers

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    Thanks, but I had to cut it short because I was rushed. I'll finish now to address some of the other comments I saw.

    Here are the obvious options, without considering human psychology and financial discipline:
    1. 0% interest financing $27k
    2. Pay cash for ??? cash discount
    3. Borrow from 3rd party at ~3-4%, pay assumed discounted cash price
    4. Pay cash for used
    5. Borrow from 3rd party at ~3-5% and buy used.

    I mentioned above that a 0% cash discount, with an option to finance at 0%, is a good option. This assumes, and this is a HUGE assumption, that the purchaser will be fiscally responsible with the cash and can leverage that cash to make reasonably more than the 0% he financed (this also applies to non-0% interest loans). Another situation where the 0% financing may make sense is if the purchaser is highly confident that his monthly income is sufficient to make those payments, along with any other monthly payments, and leave enough for savings, emergency fund, etc.

    I personally have a loan on my truck. I also have enough cash to pay it off. I am making extra payments, based on my income, not my savings, to pay it off early. Why don't I just pay it off? One primary reason: I am building a house and have not had to borrow any money yet. When I do apply for a building loan (no, I don't have the cash required to build the house I want), the bank will be MUCH more willing to work with me, including better terms, when it sees that I have already installed a driveway (~600 feet), done my own dirt work, and poured a foundation. The bank will see that I am already heavily invested in the project with my own money and, especially if I still have some working capital, will know that I am taking the house and the loan seriously. A couple of banks have already told me that.

    Now for the psychology part. If you don't have the financial discipline to follow through with your plans for the cash, then use the cash instead of a loan. Most people younger than 40 do NOT have that discipline. I know I didn't. Some people NEVER develop that discipline. I don't know you. Be honest with yourself about it. Here's a hint though: if you have not been able to save up an emergency fund (that you NEVER touch) that would cover all of your costs of living for at least three months if you happened to lose your source of income, you do NOT have the financial discipline to use low interest (including 0%) loans as a tool. Using them just strengthens the walls of your debt prison.

    I probably still left something out, but I hope this helps someone develop the mindset required to improve their financial situation, even if it means practicing delayed gratification.
     
  27. Sep 13, 2021 at 5:29 PM
    #27
    Bakershack

    Bakershack Critical of Noncritical Thinkers

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    I forgot to address something else that was mentioned. Dealers, used or new, REALLY like it when you finance through them. So much so that they may drop the price more if you finance through them. I ALWAYS finance through them to get that better price. I make sure that there is no penalty for early payoff, and I've either paid it off early using cash, or I've refinanced after about 90 days for a much more favorable interest rate. I get the better price AND the terms I want, rather than the less than favorable terms the dealers set me up with.
     
  28. Sep 13, 2021 at 6:20 PM
    #28
    Saltyhero13

    Saltyhero13 Throbbing Member

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    In my limited experience, price is negotiated before finance; finance is where they "make their money back" on the price they offered. Fees and minimum terms are what folks doing this need to pay attention to. With the low interest rates we've seen over the last several years, it looks like banks rely more on (loan) fees to generate revenue vs. interest rates.

    Dealers usually get a kick back from their preferred bank if you financing through them but I've never had a dealer reduce the price of a vehicle based on their loan offerings. Again, in my limited experience as I tend to keep my vehicles until the wheels fall off. I've only purchased three vehicles in the last 5 years, prior to this my last vehicle was purchased over 17 years ago.

    Also when the market was a buyers market, incentives tended to be mutually exclusive with loan offerings; in my case with a Tundra it was a factory rebate ~-$3K off vs 0% finance over 60 mos.

    Depending on who you bank with, I agree, the rates offered by a dealership can be subpar compared to the best rates available to the borrower through their own bank. Dealer loans also tend to have a minimum term you are required to stay in the loan. The lowest I've seen is 6 mos but I'm sure there are loans you can refinance out of the gate; on the high end I've seen 18 mos terms but I think these are more common especially with a rise in loans with a 72 month term.
     
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  29. Sep 13, 2021 at 6:40 PM
    #29
    Bakershack

    Bakershack Critical of Noncritical Thinkers

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    2020 SSM 1794 4x4
    I keep my vehicles a long time as well, but in the past five years I have bought four. One for my wife when she was t-boned, totaling her Odyssey, one for each of my kids when they started driving (both used), and my Tundra last year. The Titan I sold when I got the Tundra (NOT traded) was 14 years old and I had questions about how much further the tranny would go. I have used variations of the same strategy each time. Toyota's minimum time was 90 days for me, so I refinanced after that.

    And I always negotiate cash price first, then discussion potential additional discounts for financing. I know I said I always finance through them, but what I should have said is that I always explore that. More often than not I have been able to get something more, even if only $500. And I ALWAYS go in with preapproval from one of my preferred lenders so I'm not forced to go through the dealer.

    And you are also correct to point out that all of these possibilities change with the market. I made my deal on the Tundra right before Covid hit, so I have not tried my strategies in todays market.
     
    War Machine and ColoradoTJ like this.
  30. Sep 13, 2021 at 8:44 PM
    #30
    Saltyhero13

    Saltyhero13 Throbbing Member

    Joined:
    Aug 12, 2020
    Member:
    #50704
    Messages:
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    Vehicle:
    2020 040 1794
    That makes sense. The delta is negotiating cash price up front. Good gouge, thanks for sharing.
     
    War Machine likes this.

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