Financing strategy with low rates?

[phidauex]

Hi, this may be a bit more of a general automotive question, but I can tell there are a lot of thoughtful people here. I've never purchased a new car before (the idea is actually a bit foreign to me) but am strongly considering a MachE reservation. I see in the build tool that there are currently promotional financing options at 0.9% for 36 and 48 month financing.

I do have the cash to purchase the car outright without impacting emergency or other important funds, and I have a credit score over 750. Normally I buy used cars with (literal) cash, but with a rate that low, it seems like I should just put down whatever minimum is required to get that rate, put the rest of the money in a moderate interest-earning account, and then pay my monthly bills out of that. With 0.9% being less than inflation it is basically "free money" as long as I can put the rest of my cash to work in a low-risk, moderate-growth account.

Am I missing something? Is this a valid strategy for buying a car even if you could afford it outright? Are there any common gotchas for promotional financing rates like this that I should be aware of?

Thanks - Sam

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[macchiaz-o]

Hi, this may be a bit more of a general automotive question, but I can tell there are a lot of thoughtful people here. I've never purchased a new car before (the idea is actually a bit foreign to me) but am strongly considering a MachE reservation. I see in the build tool that there are currently promotional financing options at 0.9% for 36 and 48 month financing.

I do have the cash to purchase the car outright without impacting emergency or other important funds, and I have a credit score over 750. Normally I buy used cars with (literal) cash, but with a rate that low, it seems like I should just put down whatever minimum is required to get that rate, put the rest of the money in a moderate interest-earning account, and then pay my monthly bills out of that. With 0.9% being less than inflation it is basically "free money" as long as I can put the rest of my cash to work in a low-risk, moderate-growth account.

Am I missing something? Is this a valid strategy for buying a car even if you could afford it outright? Are there any common gotchas for promotional financing rates like this that I should be aware of?

Thanks - Sam

You're not missing anything. That is a good strategy IMO.

It gets even better if Ford offers a financing incentive, such as $1,000 cash back. That combined with a very low interest rate would be compelling to me, too.

One key though is that we don't yet know rates that will be in effect when we take delivery of our cars. (Sure, a few people may get them before 1/4/21, but I'm guessing VERY few.) So play it by ear... See what's in play on your delivery day.

 

[Woeo]

Hi, this may be a bit more of a general automotive question, but I can tell there are a lot of thoughtful people here. I've never purchased a new car before (the idea is actually a bit foreign to me) but am strongly considering a MachE reservation. I see in the build tool that there are currently promotional financing options at 0.9% for 36 and 48 month financing.

I do have the cash to purchase the car outright without impacting emergency or other important funds, and I have a credit score over 750. Normally I buy used cars with (literal) cash, but with a rate that low, it seems like I should just put down whatever minimum is required to get that rate, put the rest of the money in a moderate interest-earning account, and then pay my monthly bills out of that. With 0.9% being less than inflation it is basically "free money" as long as I can put the rest of my cash to work in a low-risk, moderate-growth account.

Am I missing something? Is this a valid strategy for buying a car even if you could afford it outright? Are there any common gotchas for promotional financing rates like this that I should be aware of?

Thanks - Sam

That would be a good strategy in ‘normal’ circumstances. Just as you describe, with the cost of money so low it seems it would be very attractive to borrow as much as they will allow.

Understand, though, that even a low risk moderate growth account could lose ground in the next year(s) as we deal with tremendous job losses, looming expiration of foreclosure and eviction moratoriums, business shutdowns, loss of commercial tenants, the coming tremendous pressure for rising taxes to refill local and federal treasuries crushed by loss of revenue and rising expenses, along with other ongoing economic effects due to the current unpleasantness.

Earning a few percent [less the .9% or 1.9%] might bring you $1,000 or $1500 in earnings annually on $50,0000 kept in the market.

Is that enough to compensate for the risk of losing $5,000 or $10,000 in a downturn?

As pessimistic as that sounds, I have not decided what I will do. I am in your situation and could borrow & leave the money to work or pay cash without impacting my financial health.

I am thankful my 1/17 build week likely pushed that determination into mid-Feb. or beyond. We will learn a lot of valuable information between now and then.

 

[DBC]

Am I missing something? Is this a valid strategy for buying a car even if you could afford it outright? Are there any common gotchas for promotional financing rates like this that I should be aware of?

No you are not missing anything. However, interest rates are very low, so a safe interest bearing account probably pays about .3%, which means that a .9% loan would not be "free money".

This isn't a big deal and shouldn't change anything. There is something to be said for matching payments with use, which is what you'd be doing.

Some people think there is only one way to buy a vehicle but I'm agnostic on the buy, finance, or lease issue. It just depends on the situation and what your needs are. If you are looking at financing a purchase, make sure to look at Ford Options. It's basically a lease in the form of a purchase with a balloon payment and seems like the best financing deal Ford is offering. The interest rate is higher but the higher incentives make up for that. You're likely to pay the same as a purchase but you have the benefit of lower payments and the ability to either buy the MME at a very attractive price or walk after three or four years if you decide the MME isn't for you. (Better to do three years because you can buy an extended service plan while still under warranty if you decide to keep the car).

And yes we only know the current options. If things change you'll need to consider all the options.

Finally, regardless of which direction you go -- look into X Plan pricing which will get you a discount. There are threads which discuss how to get this.

 

[DBC]

Earning a few percent [less the .9% or 1.9%] might bring you $1,000 or $1500 in earnings annually on $50,0000 kept in the market.

Is that enough to compensate for the risk of losing $5,000 or $10,000 in a downturn?

Agree that thinking that markets always go up is naive. However, the OP specified a "low risk moderate growth account". Not sure there is such a thing at the moment -- all the low risk accounts are also low growth. I assumed he was thinking of a Treasury or insured bank account or money market but those will pay less than .9%.

Riskier investments will potentially offer higher returns but also the potential for higher losses. In just the last year that $50K, if invested in the S&P, could have been reduced to $25K or increased to $100K. So your cautionary words are realistic not pessimistic.

Ultimately this is all time horizon dependent. As stocks go down the dividend rate increases, so even if the price doesn't recover your investment will. It just takes a lot longer than the duration of a car loan! Trying to leverage a car loan into a higher return isn't realistic but matching payments to use makes sense.

 

[Woeo]

....make sure to look at Ford Options. It's basically a lease in the form of a purchase with a balloon payment and seems like the best financing deal Ford is offering. The interest rate is higher but the higher incentives make up for that.

Certainly look at Ford Options. Although the interest rate is higher than on the Ford traditional financing program it does offer a ‘buyback’ option that could be an early out. Of some value if you have concern the MME resale value might plummet due to unknown inherent issues with the car. Of some value if BEV technologies improve dramatically in the short term crushing the value of all current generation BEVs. Selling your MME back to Ford might then make the most economic sense even if you like the car or would allow you the opportunity to move to a newer shinier Apple.

 

[phidauex]

I totally agree on the comments about being realistic on market expectations. I've been through both the dot-com and the 2007 downturns, and tend to be quite conservative with my money (which is part of why I have more free cash than I should, and no debt other than my mortgage).

In my case, I make 0.5% on a standard savings account, so that is my floor. For getting above 0.9% I was thinking something like a money market, or inflation protected bonds. While the market might do a lot of things in the next 4 years, inflation is still likely to stay ~2%.

But I'd note that even if the scheme doesn't "make" money, just the fact that you are spreading out expense with very little or no penalty can be helpful, and even at 0.9% interest and 0.9% return you come out slightly ahead because you are paying down your principle on the debt side, but interest earned is compounding (slightly).

At 0.9% interest and 0.5% return, it costs very little to take the loan, and you retain a lot of flexibility with your money over the next 4 years that you wouldn't normally have (unexpected huge medical expense? House floods and insurance fights? Unexpected job loss?). Your bottom line is the same, but it buys you time to make changes.

I will look closer into Ford Options, I was opposed to a lease, but if that is really a "purchase w/ financing that sort of looks like a lease" then maybe it is of interest to me.

As for X-Plan pricing, I somehow thought that was for Ford employees/family - is there another way to be eligible?

Thanks -Sam

 

[ChasingCoral]

The last thing to consider is Ford Cash and other incentives that may be available only if you finance or use Ford Options. As you are considering a cash purchase, you can use Ford's financing or Ford Options to get the low rate and the incentives, then pay off the loan/lease as early as you want. You'll have to check your contract's fine print but they usually don't have a pre-payment penalty as long as you wait a few months.

 

[zhackwyatt]

As for X-Plan pricing, I somehow thought that was for Ford employees/family - is there another way to be eligible?

Thanks -Sam

A/D/Z plans are for employees/families. X plan is for partners. if you work at a participating company, join the Mustang Club of America or hold Ford stock for a certain amount of time, you can qualify.

 

[KAustin]

A/D/Z plans are for employees/families. X plan is for partners. if you work at a participating company, join the Mustang Club of America or hold Ford stock for a certain amount of time, you can qualify.

You can also check one of the partner companies here https://www.oxmoorflm.com/ford-a-x-z-plans/x-plan-partner-companies/

 

[hybrid2bev]

A/D/Z plans are for employees/families. X plan is for partners. if you work at a participating company, join the Mustang Club of America or hold Ford stock for a certain amount of time, you can qualify.

X-Plan is also for friends and family that don't qualify for A/Z plan. If you can get a Ford employee to give you one of their four annual X-Plan PINs.

 

[phidauex]

join the Mustang Club of America

I checked the partner companies and my employer isn't listed, but this looks like a practical way of doing it - $25 membership fee to save ~$800.

 

[mamejunkie]

Same situation as OP. One question on the Ford Options vs Lease. Multiple people that are experienced in Leasing cars recommended to always roll everything into the lease and do NOT pay extra down payment. This is because of the insurance coverage and what they will pay if you get into a accident. Is this the same recommendation with the Ford Option? Or would you equate it to financing it and difference is instead of equal monthly payment for the term...the Ford Option is normally smaller monthly with a payment at the end?

 

[DBC]

At 0.9% interest and 0.5% return, it costs very little to take the loan, and you retain a lot of flexibility with your money over the next 4 years that you wouldn't normally have (unexpected huge medical expense? House floods and insurance fights? Unexpected job loss?). Your bottom line is the same, but it buys you time to make changes.

I will look closer into Ford Options, I was opposed to a lease, but if that is really a "purchase w/ financing that sort of looks like a lease" then maybe it is of interest to me.

Spot on. Paying monthly rather than in one lump at the beginning is what I meant by "whatever works best for your situation". Also, since you have a mortgage, looking at paying that down or refinancing might work better for you than paying for an auto up front.

Never be put off by leasing. People suggest it's different than buying but this isn't really true. The only financing difference between buying on the one hand and leasing (with an open ended lease) and then buying on the other is the acquisition fee,. This isn't charged with Ford Options (not a big deal), and since with Ford Options you hold the title you eliminate the pesky issue of being on the hook for the lease term without the ability to sell. Might come up if you get a job with company vehicle or something.

The big difference between leasing and balloon financing is the residual. On leasing it tends to be higher while under balloon financing it tends to be lower. If you end up buying it makes no difference -- paying $10K and then $20K is the same as paying $15k and $15K. As with regular financing you pay all the sales tax up front but again if you buy this doesn't make a difference.

The big knock on balloon payment financing is that when the balloon comes due some people can't qualify for financing or can't come up with the balloon payment. My impression is this isn't the case.

I don't follow bonds very much but I think TIPS are yielding .27% or something. The best deal for inflation protected securities is always I bonds, but you're restricted on the number you can purchase to a very small amount.

 

[DBC]

Same situation as OP. One question on the Ford Options vs Lease. Multiple people that are experienced in Leasing cars recommended to always roll everything into the lease and do NOT pay extra down payment. This is because of the insurance coverage and what they will pay if you get into a accident. Is this the same recommendation with the Ford Option? Or would you equate it to financing it and difference is instead of equal monthly payment for the term...the Ford Option is normally smaller monthly with a payment at the end?

The short answer is "no". The longer answer is that it depends on the amount you put down.

The problems is the same when leasing or financing -- the vehicle is totaled and you owe more than the depreciated value. (Repairs aren't an issue). You buy it for $50K, finance or lease with $0 down, drive it off the lot so it's worth $48K, and someone rears ends you at the first red light. You owe more in finance payments or lease payments than the depreciated vehicle is worth. This difference is the "Gap".

To address this situation there is GAP insurance which covers the difference between what is owed and the depreciated value of the vehicle. Most leases come with GAP insurance because most lessors want to be protected. Financing usually doesn't include GAP insurance because there is a larger down and the down payment will cover the difference. In this case getting GAP insurance is just paying for insurance you don't need. You can, however, get GAP coverage for loans, which might make sense if you finance with $0 down.

So the causation works the other way: the amount down determines whether you want GAP insurance. It's just that when leasing you usually don't have the choice of not getting it.

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