The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: Le0 on February 23, 2014, 01:30:00 PM
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I have a coworker with an SUV! He said he got 0% Financing so its just like he is slowly paying it off. Other than the $20,000 in debt and the fact that it is a SUV, I am finding it hard to see a down side to this situation.
Are there downsides to 0% Financing?
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You'd have to do the math for each situation. Usually there is a cash back alternative when 0% financing is offered, you'd need to figure out which would lead to greater savings. I think cash back whens like 80% of the time.
The big downside is debt in general, cash flow is such a nice luxury to have.
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Are there downsides to 0% Financing?
For cars, there are usually not the same gotchyas in the contract to 0% financing that things like furniture/TVs have.
But, the major gotchya is that, in general, to get 0% financing you're likely paying a high price for a brand-new depreciating product.
Consider the fact that you'll only find commercially available (as opposed to a loan from a family member) 0% financing with high-markup depreciating material goods like cars/furniture/TVs.
That, in and of itself, should give the guidance.
You can't finance houses for 0% to live in or rent out; you can't borrow on margin in a stock account for 0%; you can't get a business loan for 0%.
Essentially, if you want to purchase a brand new vehicle and you can negotiate a reasonable deal which includes 0% financing, nothing wrong with it.
But, you might have been able to negotiate a better overall deal with a different interest rate, you might have been able to buy an equivalent car a few years old and saved money, etc.
In this forum there would be general consensus that getting the 0% wasn't dumb; rather, the dumb move was buying a brand new SUV and thinking you were smart.
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Couple gotchas:
-You'll be inclined to behave like you have $20,000 more in the bank than you actually do
-Lots of opportunities to miss a payment, they might mess up and not record your payment (good luck getting out of that mess)
-If you're doing this because it would hurt too much to take $20,000 out of your liquid savings, don't do it. You're just fooling yourself.
Sure mathematically it makes sense, but there are some reason to not do it as well. This sort of term debt can really add up for the unsuspecting and I'd recommend avoiding it.
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There is no free lunch. Would you rather pay 0% on a $20,000 vehicle or 5% on a $19,000, which you can then pay off in full the second month? The dealership will usually kick your butt on the math.
The frugal way is to pay cash for the cheapest used car you can bear. If you have negotiated tooth and nail for a vehicle and are getting the best possible price and then someone offers 0% you should take it. Only possible downside is to your credit.
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So I guess its more the obvious. $20,000 debt is too much debt period. No matter if its 0% or 10% financed. I agree with this.
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So I guess its more the obvious. $20,000 debt is too much debt period. No matter if its 0% or 10% financed. I agree with this.
Maybe $20,000 is too much to spend on a car, but if it's the same price you'd pay either way, and you expect your invested assets to have a positive return in that period, it's not too much debt.
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Particularly with a car. 20k is to much debt. Don't know cash position but better off buying a used car debt free if you can afford one.