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My daughter just turned 16, and we had saved up to buy her a car for her birthday. One dealership we talked to tried to add a $2000 charge as a "penalty" for p

My daughter just turned 16, and we had saved up to buy her a car for her birthday. One dealership we talked to tried to add a $2000 charge as a "penalty" for paying cash instead of taking a loan.

ProAm 5y ago
Hopefully you walked away?
- commandlinefan 5y ago
  Yes, I did.
tantalor 5y ago
1. Take out loan anyway 2. Pay it off the next day
- toomuchtodo 5y ago
  If the loan has great terms, keep the loan and invest the cash. That’s a lesson in itself.
  - abfan1127 5y ago
    Its a lesson about risk. Your investments can sour. Put it another way. If you had a paid off car, would you take a loan out on it to invest?
    - deleted 5y ago
      [deleted]
    - deleted 5y ago
      [deleted]
    - iamricks 5y ago
      There is risk in cash, it is called inflation, if you bought a car last year you lost 7% + depreciation of the car since you bought it. The SP500 is up 11% since last year. This means you would have lost 7% to inflation, 11% to potential upside plus depreciation of your car. Assuming your car did not depreciate because of current car production shortages you lost 18% of your money buying cash vs 3%-4% interest on the loan. Cash is not risk free
      - b112 5y ago
        Cash inflation has nothing to with a new product decreasing in value, due to wear, tear, and being used, after purchase.
      - ryathal 5y ago
        your investment lost 7% to inflation too. 7% of that 11% isn't gain. That puts you up 4% - interest rate * risk factor.
        frumper 5y ago
        To add on to your comment, you're also going to be paying taxes on that 11%. That 4% is looking more like 1-2% for most people.
    - brianwawok 5y ago
      Yes. If I had 1M in the bank and went to buy a 500k house, and was offered like a 3% APR loan, would I take it? Yes. Reasons being: 1) I can make 5-6% return with my money. So I can pay the interest and still come out ahead. 2) That mortgage interest is tax deductible, so it costs a little bit less than 3%, maybe only 2.5% to me 3) Real estate market crashes and house is worth 200k? Especially in a no-recourse state, you can leave the keys and walk. The bank takes on the downside risk of your house, not you.
      - SketchySeaBeast 5y ago
        Argument #1 is a "should", not a "will", so there's definitely risk there. Considering the average stock market gain is something like 10% and we're sitting at way over that, it would stand to reason that if that average holds at some point we're going to get below average performance. It's a gamble. Regarding #3 - doesn't that do a number on your credit? And how many states are non Recourse? As I understand it here in Canada those agencies that backed your loan (the bank or the CMHC) will attempt to recoup their losses by taking you to court if they have to.
        brianwawok 5y ago
        1) Sure, always a risk. 3) > Home mortgages—though generally recourse—are non-recourse in 12 states: Alaska, Arizona, California, Connecticut, Idaho, Minnesota, North Carolina, North Dakota, Oregon, Texas, Utah and Washington. If a homeowner defaults in one of these states, the lender can foreclose on the collateralized home but cannot go after the borrower’s other assets. Generally taking a credit hit for a few 100k is a fine trade off. You can even buy a new house right before you walk away from your old house..
    - fennecfoxen 5y ago
      At a 2.49%-3.84% interest rate? [1] YES. Hell yes. That's better-than-free money, adjusting for inflation. If you haven't maxed out your I-bond purchases yet, you can get 7.12% basically risk-free. [1] https://www.bankrate.com/loans/auto-loans/rates/ https://www.bankrate.com/loans/auto-loans/rates/
      - alistairSH 5y ago
        2.49% is high for a loan through the dealer. My BMW loan is 0.9% and my Honda loan is 1.9%.
        fennecfoxen 5y ago
        Even better!
        Kirby64 5y ago
        It's only high if the dealership isn't offering incentives in some way. That 0.9% APR is because BMW (or the dealership) is subsidizing it in kickbacks. Not every dealership/brand does that.
      - JumpCrisscross 5y ago
        > If you haven't maxed out your I-bond purchases yet, you can get 7.12% basically risk-free Those are being issued at 0% real. The initial rate is 7.12%, but that figure fluctuates with CPI-U. Betting that American inflation will keep raging at 2.5%+ isn’t a terrific bet. That said, your broader point is valid. Money at 2.5% should not be paid back. There are good bonds yielding more, to saying nothing of dividend-paying stocks.
  - theandrewbailey 5y ago
    How many people actually do that? No one I know of talks about taking a loan for something they would have paid cash for, then turning around and putting the cash into their Robinhood/Fidelity/Schwab/etc. account. In fact, I haven't even read stories of people doing that, despite all this "advice".
    - turtlebits 5y ago
      Depends on the interest rate. When rates are low, borrowing money and having liquid assets can be a better choice (ie. putting the money into an index fund)
    - toomuchtodo 5y ago
      There is a level of financial means and sophistication that is required admittedly.
    - anotherman554 5y ago
      All of these people saying "take a loan and you'll make money in the stock market" are wrong. You can't "make money" in stocks, from the perspective of choosing whether to take a loan, you can only "expect to make money". That's a huge difference. And a number of experts say you shouldn't invest in stocks if you need the money in the next 5 years, so that's another strike against this advise.
      - SketchySeaBeast 5y ago
        I think the last few years have given people false confidence about the market. Sure the trend generally goes up, but if your loan came due in March 2020 that money wouldn't have been there.
    - deleted 5y ago
      [deleted]
- hdjjhhvvhga 5y ago
  Don't some bank loans have a clause for a similar penalty for an earlier repayment?
  - 2OEH8eoCRo0 5y ago
    Yes.
- Scoundreller 5y ago
  I used to do this at department stores with store card signups. Except I’d make a payment at the till right after purchase and call and cancel the card as I’m walking out.
  - giantg2 5y ago
    Just be careful. I think canceling cards can negatively impact credit score.
  - orev 5y ago
    That’s really not great to do long-term, as it would impact your credit rating. Stores cards are seen as one of the worst types of credit, so that will lower it. Also the hard pull on the report as part of the signup process, and the act of cancellation all will lower your score. It’s like a 3x bad strategy.
    - Scoundreller 5y ago
      I was years away from getting a mortgage
    - ryathal 5y ago
      Credit score only matters if you want to borrow money. If you already have a mortgage, your credit score is basically invincible unless you stop paying or declare bankruptcy. Fluctuations for hard pulls and closing accounts are temporary.
- micromacrofoot 5y ago
  I oddly had to wait a few months to pay off my loan to avoid a penalty. So they made a very small amount of interest. Can't imagine it was worth it.
itslennysfault 5y ago
Get them to agree to a price in writing before you discuss financing options. Once they give you the financing options "decide" that you'll just pay in cash.
tmm84 5y ago
Having worked at a car dealership this is just the left hook if you will. You got them to go down on the price and when it comes time for them to get you to sign on the dotted line they add "fees" to add back what you took off. Many of the sales people I knew just shrugged it off, you can't buy the car for almost the cost and not expect us to get money back somewhere. So, in reality the car dealership (most dealerships sell various makes if they are successful) makes money on financing/fees and not the actual car itself. However, car sales people make money on the price the vehicle sells for (the price without financing/fees). The parties who care about the price of the "car" is the buyer and sales person but the parties that care about the total cost are the dealership and the buyer.

My daughter just turned 16, and we had saved up to buy her a car for her birthday. One dealership we talked to tried to add a $2000 charge as a "penalty" for paying cash instead of taking a loan.

ProAm 5y ago

Hopefully you walked away?

commandlinefan 5y ago
Yes, I did.

tantalor 5y ago

1. Take out loan anyway 2. Pay it off the next day

toomuchtodo 5y ago
If the loan has great terms, keep the loan and invest the cash. That’s a lesson in itself.
- abfan1127 5y ago
  Its a lesson about risk. Your investments can sour. Put it another way. If you had a paid off car, would you take a loan out on it to invest?
  - deleted 5y ago
    [deleted]
  - deleted 5y ago
    [deleted]
  - iamricks 5y ago
    There is risk in cash, it is called inflation, if you bought a car last year you lost 7% + depreciation of the car since you bought it. The SP500 is up 11% since last year. This means you would have lost 7% to inflation, 11% to potential upside plus depreciation of your car. Assuming your car did not depreciate because of current car production shortages you lost 18% of your money buying cash vs 3%-4% interest on the loan. Cash is not risk free
    - b112 5y ago
      Cash inflation has nothing to with a new product decreasing in value, due to wear, tear, and being used, after purchase.
    - ryathal 5y ago
      your investment lost 7% to inflation too. 7% of that 11% isn't gain. That puts you up 4% - interest rate * risk factor.
      - frumper 5y ago
        To add on to your comment, you're also going to be paying taxes on that 11%. That 4% is looking more like 1-2% for most people.
  - brianwawok 5y ago
    Yes. If I had 1M in the bank and went to buy a 500k house, and was offered like a 3% APR loan, would I take it? Yes. Reasons being: 1) I can make 5-6% return with my money. So I can pay the interest and still come out ahead. 2) That mortgage interest is tax deductible, so it costs a little bit less than 3%, maybe only 2.5% to me 3) Real estate market crashes and house is worth 200k? Especially in a no-recourse state, you can leave the keys and walk. The bank takes on the downside risk of your house, not you.
    - SketchySeaBeast 5y ago
      Argument #1 is a "should", not a "will", so there's definitely risk there. Considering the average stock market gain is something like 10% and we're sitting at way over that, it would stand to reason that if that average holds at some point we're going to get below average performance. It's a gamble. Regarding #3 - doesn't that do a number on your credit? And how many states are non Recourse? As I understand it here in Canada those agencies that backed your loan (the bank or the CMHC) will attempt to recoup their losses by taking you to court if they have to.
      - brianwawok 5y ago
        1) Sure, always a risk. 3) > Home mortgages—though generally recourse—are non-recourse in 12 states: Alaska, Arizona, California, Connecticut, Idaho, Minnesota, North Carolina, North Dakota, Oregon, Texas, Utah and Washington. If a homeowner defaults in one of these states, the lender can foreclose on the collateralized home but cannot go after the borrower’s other assets. Generally taking a credit hit for a few 100k is a fine trade off. You can even buy a new house right before you walk away from your old house..
  - fennecfoxen 5y ago
    At a 2.49%-3.84% interest rate? [1] YES. Hell yes. That's better-than-free money, adjusting for inflation. If you haven't maxed out your I-bond purchases yet, you can get 7.12% basically risk-free. [1] https://www.bankrate.com/loans/auto-loans/rates/ https://www.bankrate.com/loans/auto-loans/rates/
    - alistairSH 5y ago
      2.49% is high for a loan through the dealer. My BMW loan is 0.9% and my Honda loan is 1.9%.
      - fennecfoxen 5y ago
        Even better!
      - Kirby64 5y ago
        It's only high if the dealership isn't offering incentives in some way. That 0.9% APR is because BMW (or the dealership) is subsidizing it in kickbacks. Not every dealership/brand does that.
    - JumpCrisscross 5y ago
      > If you haven't maxed out your I-bond purchases yet, you can get 7.12% basically risk-free Those are being issued at 0% real. The initial rate is 7.12%, but that figure fluctuates with CPI-U. Betting that American inflation will keep raging at 2.5%+ isn’t a terrific bet. That said, your broader point is valid. Money at 2.5% should not be paid back. There are good bonds yielding more, to saying nothing of dividend-paying stocks.
- theandrewbailey 5y ago
  How many people actually do that? No one I know of talks about taking a loan for something they would have paid cash for, then turning around and putting the cash into their Robinhood/Fidelity/Schwab/etc. account. In fact, I haven't even read stories of people doing that, despite all this "advice".
  - turtlebits 5y ago
    Depends on the interest rate. When rates are low, borrowing money and having liquid assets can be a better choice (ie. putting the money into an index fund)
  - toomuchtodo 5y ago
    There is a level of financial means and sophistication that is required admittedly.
  - anotherman554 5y ago
    All of these people saying "take a loan and you'll make money in the stock market" are wrong. You can't "make money" in stocks, from the perspective of choosing whether to take a loan, you can only "expect to make money". That's a huge difference. And a number of experts say you shouldn't invest in stocks if you need the money in the next 5 years, so that's another strike against this advise.
    - SketchySeaBeast 5y ago
      I think the last few years have given people false confidence about the market. Sure the trend generally goes up, but if your loan came due in March 2020 that money wouldn't have been there.
  - deleted 5y ago
    [deleted]
hdjjhhvvhga 5y ago
Don't some bank loans have a clause for a similar penalty for an earlier repayment?
- 2OEH8eoCRo0 5y ago
  Yes.
Scoundreller 5y ago
I used to do this at department stores with store card signups. Except I’d make a payment at the till right after purchase and call and cancel the card as I’m walking out.
- giantg2 5y ago
  Just be careful. I think canceling cards can negatively impact credit score.
- orev 5y ago
  That’s really not great to do long-term, as it would impact your credit rating. Stores cards are seen as one of the worst types of credit, so that will lower it. Also the hard pull on the report as part of the signup process, and the act of cancellation all will lower your score. It’s like a 3x bad strategy.
  - Scoundreller 5y ago
    I was years away from getting a mortgage
  - ryathal 5y ago
    Credit score only matters if you want to borrow money. If you already have a mortgage, your credit score is basically invincible unless you stop paying or declare bankruptcy. Fluctuations for hard pulls and closing accounts are temporary.
micromacrofoot 5y ago
I oddly had to wait a few months to pay off my loan to avoid a penalty. So they made a very small amount of interest. Can't imagine it was worth it.

itslennysfault 5y ago

Get them to agree to a price in writing before you discuss financing options. Once they give you the financing options "decide" that you'll just pay in cash.

tmm84 5y ago

Having worked at a car dealership this is just the left hook if you will. You got them to go down on the price and when it comes time for them to get you to sign on the dotted line they add "fees" to add back what you took off. Many of the sales people I knew just shrugged it off, you can't buy the car for almost the cost and not expect us to get money back somewhere. So, in reality the car dealership (most dealerships sell various makes if they are successful) makes money on financing/fees and not the actual car itself. However, car sales people make money on the price the vehicle sells for (the price without financing/fees). The parties who care about the price of the "car" is the buyer and sales person but the parties that care about the total cost are the dealership and the buyer.