Price Protection Order - Why should I take Options over Finance?

[daemonic3]

This doesn't apply to everyone's situation obviously, but the strategy of taking the Options rebate is great if you can secure other funding (like a credit union loan) to pay it off within a billing cycle or two. Of course it only works if the rate is better, like the 1.9% you mention if you can find it externally.

I went with (again, not an option for everyone) a 401k loan. The interest rate is something like 6% for 60 months, but you are borrowing from yourself and paying back yourself including the interest. Example if you borrow $50k from yourself, you end up paying yourself back something like $58k over those 60 months.

Only mentioning it because many people don't know they can do this. Fidelity makes it easy so that was the route I went, and I took the $1500 Options rebate. I don't mind paying loan interest if it is going toward my retirement!

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[MnSparty38]

I went with (again, not an option for everyone) a 401k loan. The interest rate is something like 6% for 60 months, but you are borrowing from yourself and paying back yourself including the interest. Example if you borrow $50k from yourself, you end up paying yourself back something like $58k over those 60 months.

I didn’t think it worked like that. Don’t you get hit with a 10% early withdrawal penalty (if under the minimum withdrawal age), and miss out on compounding interest on that $50k?

 

[priext]

I didn’t think it worked like that. Don’t you get hit with a 10% early withdrawal penalty (if under the minimum withdrawal age), and miss out on compounding interest on that $50k?

Not OP but you only get hit with the withdrawal penalty if you fail to pay it back in full from my understanding. If you were to change employers it would be required to be paid back in full upon termination (though some employers may have payment plan options). I can't comment on missing out on the compounding interest but the way it was explained to me is that you are "selling" the assets in the 401k at their market value at that point in time. If the portfolio goes up more than the "interest rate" then you would be missing out on that value...but if the value goes up less than the interest rate or goes lower then you would actually becoming out ahead of what the portfolio would have done otherwise.

 

[Vulnox]

I didn’t think it worked like that. Don’t you get hit with a 10% early withdrawal penalty (if under the minimum withdrawal age), and miss out on compounding interest on that $50k?

'There is no penalty for a 401k loan unless your 401k management company charges a fee, most don't.

The biggest issue with this is the loss of compound interest as you noted PLUS the market is low right now so you may be selling at a low value. If you took out the loan in maybe early 2021 when the market was high, it may be a great deal because the market dropped a bit since then, so your percent of lost value may offset the interest, plus when you pay the loan you are buying back in at a lower rate.

But taking that same loan now when your 401k has likely lost 15% value or so in the last year is probably a terrible idea. The loan comes still by taking you out of your investments at the value of those investments at the time, which may be (hopefully) at their low point right now. So you have to sell let's say 10,000 shares at $5/share to get $50k. If the value of those same shares goes up to $8/share as you are paying back the loan, you have to buy back in at that rate. The $50k only gets you 6,250 shares (roughly, you would likely be buying back at different values as the market goes back up) and long term your 401k is far worse off.

It's a bit of a gamble. The above is a simplification, but I wouldn't take a 401k loan on a typically depreciating asset like a car. We used a 401k loan for our first house down payment, but it was far less than $50k and luckily our hose value went up significantly. To each their own, I am not an accountant etc, etc. But I personally wouldn't go that route right now with the market being low.

 

[daemonic3]

I didn’t think it worked like that. Don’t you get hit with a 10% early withdrawal penalty (if under the minimum withdrawal age), and miss out on compounding interest on that $50k?

I know its off topic, but with Fidelity, an early withdrawel (not loan) has penalty (I think 10%) like you mention. A loan is just borrowing from yourself no penalty, only a small quarterly maintenance fee (a few bucks).

The risks are: 1) if you lose your job you are now liable for those funds or they won't let you roll your 401k to an IRA, and 2) if your 401k was invested in the market, you won't get those market gains because you pulled it out as cash

So you can weigh the opportunity cost for unrealized gains/interest versus paying someone else interest. The market is about to bounce back so pulling investments now is bad but it wasn't so bad 4 weeks ago! I do like that it is all done online, is auto deducted from paychecks, and doesn't impact credit score.

Again, not for everyone but is an option for some.

 

[Pioneer74]

I would go with Options. The thought of a 72 month loan makes my stomach queasy.

I plan on going with the Options financing when our February order gets delivered (hopefully) in November. I just can't decide on 36 or 48 month.

 

[MnSparty38]

I would go with Options. The thought of a 72 month loan makes my stomach queasy.

I plan on going with the Options financing when our February order gets delivered (hopefully) in November. I just can't decide on 36 or 48 month.

i asked my dealer for my options rate, and he seems reluctant at providing to me for some reason. Also a Feb order, Oct build date.

 

[Pioneer74]

i asked my dealer for my options rate, and he seems reluctant at providing to me for some reason. Also a Feb order, Oct build date.

Some don't like to talk numbers until the vehicle shows up. My dealership sales department has always been accommodating to me. Heck, the Mach-E order was just a fall-back of I didn't get a Lightning this year. Turns out I'm getting both.

 

[RickMachE]

This doesn't apply to everyone's situation obviously, but the strategy of taking the Options rebate is great if you can secure other funding (like a credit union loan) to pay it off within a billing cycle or two. Of course it only works if the rate is better, like the 1.9% you mention if you can find it externally.

I went with (again, not an option for everyone) a 401k loan. The interest rate is something like 6% for 60 months, but you are borrowing from yourself and paying back yourself including the interest. Example if you borrow $50k from yourself, you end up paying yourself back something like $58k over those 60 months.

Only mentioning it because many people don't know they can do this. Fidelity makes it easy so that was the route I went, and I took the $1500 Options rebate. I don't mind paying loan interest if it is going toward my retirement!

Some retirement plans don't let you contribute while you have a loan. You're also losing that tax free growth in a rising market. If you only do a short term loan, no big deal. But for 60 months, generally a bad idea. In general, borrowing from your 401k outside an emergency is a bad idea.

 

[Vulnox]

I would go with Options. The thought of a 72 month loan makes my stomach queasy.

I plan on going with the Options financing when our February order gets delivered (hopefully) in November. I just can't decide on 36 or 48 month.

It would be 60 month for the 1.9%, works out to roughly the same monthly payment as the 36 month options.

I think something that may sway me, if anyone knows, I asked earlier about the finance and if I was able to put the full $7500 credit towards the loan how it would impact it.

For Options, since it does have a set end date (well, until the balloon payment), does overpaying/applying the $7500 lower the monthly payment?

So say my monthly payment with options was $500/mo for 36 months, idea being that I would have paid $18k over the 36 months before the balloon payment. Then 6 months in I get my tax refund and get the full $7500 (I know that isn't guaranteed, just using it to keep things simple). If I make a $7500 payment, does it lower the monthly cost to, roughly, $250?

Yes I know there are taxes and interest and other things that play into the numbers. I picked simple numbers as a simple example, since I am mainly just trying to find out if applying the rebate lowers the monthly cost, or if the structure of options forces something funky to happen, like you just don't pay for 12 months or whatever.

Thanks again!

 

[Triggerhappy007]

https://www.fidelity.com/viewpoints/financial-basics/taking-money-from-401k

 

[Travman1974]

It would be 60 month for the 1.9%, works out to roughly the same monthly payment as the 36 month options.

I think something that may sway me, if anyone knows, I asked earlier about the finance and if I was able to put the full $7500 credit towards the loan how it would impact it.

For Options, since it does have a set end date (well, until the balloon payment), does overpaying/applying the $7500 lower the monthly payment?

So say my monthly payment with options was $500/mo for 36 months, idea being that I would have paid $18k over the 36 months before the balloon payment. Then 6 months in I get my tax refund and get the full $7500 (I know that isn't guaranteed, just using it to keep things simple). If I make a $7500 payment, does it lower the monthly cost to, roughly, $250?

Yes I know there are taxes and interest and other things that play into the numbers. I picked simple numbers as a simple example, since I am mainly just trying to find out if applying the rebate lowers the monthly cost, or if the structure of options forces something funky to happen, like you just don't pay for 12 months or whatever.

Thanks again!

If you make a large payment believe you can call and request that they re aromatize the loan, that would bring your monthly payment down. Not sure if that applies to all states.

 

[devmach-e]

Some retirement plans don't let you contribute while you have a loan. You're also losing that tax free growth in a rising market. If you only do a short term loan, no big deal. But for 60 months, generally a bad idea. In general, borrowing from your 401k outside an emergency is a bad idea.

Fidelity allowed me to borrow money several times from my 401k, and still make regular contributions while I was paying it back. The amount of the loan was spread amongst the various funds I was in. For some funds, I was "making" more on the loan than I was for the fund itself.

 

[GreaseMonkey]

I went with (again, not an option for everyone) a 401k loan. The interest rate is something like 6% for 60 months, but you are borrowing from yourself and paying back yourself including the interest. Example if you borrow $50k from yourself, you end up paying yourself back something like $58k over those 60 months.

So why wouldn’t you let someone else pay you 6% return (or much much more) on your 401(k), while you borrow someone else’s money and pay them 1.9%?

 

[Pioneer74]

I think something that may sway me, if anyone knows, I asked earlier about the finance and if I was able to put the full $7500 credit towards the loan how it would impact it.

I've, personally, never known an auto loan to have the payment recalculated by putting a chunk of money toward the principal after the loan is established. The loan payment stays the same, you just pay less interest and it is closed sooner.

I have heard of land loans and personal loans that do this so it's not unheard of.

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