0% doesn't always mean 0%

[DavesTractor]

There are many ways to look at the pricing issue. In a pure sense, the real price of an item is found when the item is stripped of "included" costs that are already factored into the price. An item with free delivery has delivery costs already factored into the price. It is not free in reality, but included. An item advertised at a certain price with 0% financing has the cost associated with that "free" financing built in. I can price all my tractors with free delivery and free 0%, and I sometimes do that with certain models. But what if a guy comes in with $100 bills instead of financing, and a truck and trailer to haul it home? I could calculate the cost of the 0% and for this discussion lets say it is $1500. And let's say the free delivery actually cost me on average $175. Is it wrong to give this cash customer the tractor for $1500 + $175 = $1675 discount for the items that were packed into the initial advertised price? That is one way to price things. Pack into the price those things that customers desire, then offer some discounts for the customer not needing those subsidized benefits.

Likewise, a dealer could advertise bare price for a cash (or standard non-subsidized finance rate) deal, FOB dealer lot. If a guy wants delivery, he pays $2/mile. If low rate financing is desired, the price goes up the same amount it costs me to provide 0% financing. I generally price a few models in this manner. The bargain hunter loves it, the 0% guy does not. We really do not like the thought that these free things aren't actually free.

Mahindra is upfront with the dealers on what the low rate financing actually costs, and allows the dealers to price in whatever manner they prefer. The problem is that people really, really want to think that 0% financing is free. It isn't. It is often a good deal if you pencil it out, even with the raised initial price, but it isn't actually free.

One other tactic is to offer the 0% and then offer no discount if you pay cash. Get out the spreadsheets and figure out how many people would take you up on the offer and spread those costs across all models. That works and makes the 0% buyer feel really good, but as a cash buyer myself for most items, I really do not like subsidizing free interest for others.

As a dealer, I like hearing what people think about pricing methods. Because no matter what a dealer or company figures out and thinks is fair, the perception of the customer is hugely important. At the end of the day, we need to sell tractors and be fair to both our cash and our finance buyers.

 

[tedhrs]

There are many ways to look at the pricing issue. In a pure sense, the real price of an item is found when the item is stripped of "included" costs that are already factored into the price. An item with free delivery has delivery costs already factored into the price. It is not free in reality, but included. An item advertised at a certain price with 0% financing has the cost associated with that "free" financing built in. I can price all my tractors with free delivery and free 0%, and I sometimes do that with certain models. But what if a guy comes in with $100 bills instead of financing, and a truck and trailer to haul it home? I could calculate the cost of the 0% and for this discussion lets say it is $1500. And let's say the free delivery actually cost me on average $175. Is it wrong to give this cash customer the tractor for $1500 + $175 = $1675 discount for the items that were packed into the initial advertised price? That is one way to price things. Pack into the price those things that customers desire, then offer some discounts for the customer not needing those subsidized benefits.

Likewise, a dealer could advertise bare price for a cash (or standard non-subsidized finance rate) deal, FOB dealer lot. If a guy wants delivery, he pays $2/mile. If low rate financing is desired, the price goes up the same amount it costs me to provide 0% financing. I generally price a few models in this manner. The bargain hunter loves it, the 0% guy does not. We really do not like the thought that these free things aren't actually free.

Mahindra is upfront with the dealers on what the low rate financing actually costs, and allows the dealers to price in whatever manner they prefer. The problem is that people really, really want to think that 0% financing is free. It isn't. It is often a good deal if you pencil it out, even with the raised initial price, but it isn't actually free.

One other tactic is to offer the 0% and then offer no discount if you pay cash. Get out the spreadsheets and figure out how many people would take you up on the offer and spread those costs across all models. That works and makes the 0% buyer feel really good, but as a cash buyer myself for most items, I really do not like subsidizing free interest for others.

As a dealer, I like hearing what people think about pricing methods. Because no matter what a dealer or company figures out and thinks is fair, the perception of the customer is hugely important. At the end of the day, we need to sell tractors and be fair to both our cash and our finance buyers.

0% is not free. If you finance through any company there is always cost associates to it....fee for filing...credit check fee...hourly salary for the person at the finance company...the fee for even using that particular company..etc.....it just means at the end of the term you will have paid more for your tractor than someone who pays cash out right.
No finance company can offer you a 0% rate without it costing someone something...that someone is usually the buyer and not the dealer.

 

[lantxinNETX]

Funny thing is....just made me think of not buying a 4035 based on this breakdown. Am now looking for a little less tractor.

Why?

Because you think the 4035 is going to be too much tractor? Or because you don't like the idea of 'paying' for the 0% financing?

If you think the 4035 is the best tractor, then buy it and go with the financing that suits you the best. I went with the 0% through Mahindra because for me it just made the most sense - I know that my payment is going to be the same for the next 60 months and I am not paying any intererst. Did I pay a little more up front? Yes. But the total of the payments - just like you detailed above - was LESS to pay MORE for the tractor up front and use the 0% financing than it was to pay less up front but pay interest for 60, 72 or 84 months.

And you haven't brought it up, but I have seen others comment on wanting to pay their tractors off before the end of their loans. Why? Do these folks really have no credit card debt, no auto loan debt, nothing else that has a higher interest rate than their tractor loan? I would bet that even Mahindra's 4.25% rate is lower - probably way lower - than any other interest rate that a person is paying.

 

[kootch88]

The 4.15% is higher than any loan I have had in at least 8 years, including my mortgage, so it isn't that great of a rate, but credit unions, especially company ones like mine, almost always beat that rate. I'm not complaining about Mahindra's rate, it is what it is, but if you have great credit there are a lot of better options. Negotiate a cash price and pay with a check. I got 1.9% on my tractor with my credit union last March. I could have gone as long as 6 years, but decided 4 was enough to make it painless.

 

[lantxinNETX]

Just an FYI on the Mahindra financing. I thought I was negotiating with the intent of taking advantage of the 0% for 5 years. After all was said and done, I learned I needed to write a check for that privilege. I ended up going with the regular financing with the intent of refinancing with my credit union at 2.99%, but I was rather angry with how the process worked. The owner knew I was ticked and threw in a weight box (JD) and painted it Mahindra red, but still, I could not find anywhere on the website where I would have to write a check for $1375.

kootch88 - I just saw that you were the OP in this thread. Just curious - why exactly where they asking you to write a check for $1375. How was that connected to the 0% financing offer? My 0% for 60 months did not require me to pay anything in advance.

 

[kootch88]

I negotiated a price thinking there was also 0% financing, but in order to get that I had to write a check for $1375, which really pissed me off. It should have been disclosed right away. I could have added the $1375 to the price too, since my credit was strong enough. It wasn't the money that really pissed me off, it was the maneuvering I felt had taken place. He said he told me, but I am pretty **** about everything, especially money, so I doubt he did. But I love the tractor and got my own financing so I am happy in the end.

 

[kootch88]

FYI, my rate was not 1.9 but 2.9% I had a typo in a post a few back.

 

[LAWALLSTRACTOR]

kootch88 - I just saw that you were the OP in this thread. Just curious - why exactly where they asking you to write a check for $1375. How was that connected to the 0% financing offer? My 0% for 60 months did not require me to pay anything in advance.

That is because your dealer didn't bring up the subject, he just silently included it in the price he quoted you on the tractor.

 

[lantxinNETX]

That is because your dealer didn't bring up the subject, he just silently included it in the price he quoted you on the tractor.

Which I knew because he was right up front with quoting me three prices for the tractor - 0% for 60 months, 1.9 % for 72 months or x.x% for 84 months. (I don't recall that last rate.) My dealer never made a secret of the fact that the discounted financing came at a price.

 

[DavesTractor]

The 4.15% is higher than any loan I have had in at least 8 years, including my mortgage, so it isn't that great of a rate, but credit unions, especially company ones like mine, almost always beat that rate. I'm not complaining about Mahindra's rate, it is what it is, but if you have great credit there are a lot of better options. Negotiate a cash price and pay with a check. I got 1.9% on my tractor with my credit union last March. I could have gone as long as 6 years, but decided 4 was enough to make it painless.

In my experience, not many people can beat even the 3.99% rate on a tractor purchase at outside banks or credit unions. If you can, then it is a no brainer to take the best cash price and then just bring in the check from the CU.

Low interest is becoming the norm. Young folks will be surprised one day when it is 10% to buy a tractor again. It will happen I suspect. Now is a good time to buy. Low interest rates means it is cheaper for companies to floor plan tractors and for consumers to buy them. Once rates tick back up, true costs to purchase may go up significantly as it affects costs at many levels in the food chain.

 

[kootch88]

Remember the 13% interest rates for a home, 21% for cars? And that was for good credit. When I bought my first house it was 7.75% and I thought I was stealing money!

 

[angryfafnir]

I am a complete tractor newbie. Just bought a 25 acre place that came with an old (not working) Farmall and a lot of work to do...and deciding what I need/want for a tractor. Love reading here and seeing the collective knowledge and experience.
That said I am a little bit familiar with how money works, forgive me in advance for the long post, complicated subject. If you want a very simple explanation of “interest” than just remember this “interest is the RENT you pay to use somebody else’s money”. When you finance something you are ALWAYS using somebody else’s money.
More complicated is below.
Yes there is a "cost" and a "price" for anything that is sold, including tractors. That tractor "cost" a certain amount to make, and some more to ship, and some again to make those cool advertising videos. Then there is the "price": what has to be paid that cover all of that "cost" plus enough for the dealer to stay in business and make a profit. For simplicity think of price = cost plus the profit margin. That is the easy part. If everybody paid cash and there was never any credit then everything would work just like that. (Skipping over "barter" and commission considerations which seek to increase the margin so the PROFIT gets bigger after costs are covered) Grocery stores work on incredibly tiny margins and focus on continuous and large turn over. As you sell fewer and fewer items you have to get bigger and bigger margins on each individual sale. So back to tractors…and I am going to make up some easy numbers here…
lets say a dealer buys 20 tractors whole sale from the manufacturer at $20,000 each. He has spent 400,000 on tractors. If he just put that $400,000 in the bank instead of buying tractors he would get an interest return on that money, lets say 2.0% a year. At the very minimum for any of this to worth the dealer’s time then he has to make AT LEAST $8000. Now add whatever expenses the dealer has to run his business to that, say $92,000 a year and we have a rough $500,000 which spread over 20 tractors = $25,000. That is the PRICE of that tractor and incidentally indicates that he needs a 25% profit margin on each tractor in order stay in business and take home 400 dollars from each sale.
So cash sales = each sale means the dealer can buy another tractor to sell, pay employees, and bring that above mentioned 400 dollars home to momma. And the business moves along.
Finance = complicated. First you have to consider that you are now using (renting) his money to pay for that tractor. Second you have to consider that in order to get another tractor in the shop to sell the dealer needs to have $20,000. Finally we already know that the dealer can get 2% interest if he just put the money in the bank (So you KNOW that he isn’t going to just let you use his money for anything less than 2%)
So in order to even consider letting somebody finance a tractor with his money the dealer needs to address those three things you just considered. That means he has to add that to the “COST” of the tractor he sells you. Start by adding the 2%. Now add some more to that because you are more of a risk then letting the bank use it, add another 2%. Now add that he still needs to pay to run his shop and that cost money every month, add another 2%. He also needs to start getting enough money together to so he can buy another tractor long before you pay off the first one … or he will soon have no tractors to sell, add another 2%. Don’t forget inflation add another 2%. So the new COST is 10% higher than the original 20,000 = 22,000. Now add that profit margin of 25% on to that cost and your PRICE is 27500…which he will let you pay in 60 monthly installments at “no additional” interest charge.
Then for every place in the above explaination that I had “dealer” switch it for “the manufacturer” and the put the dealer in the “buyer” position and run the process through again. Then put the “raw material supplier” in the “manufacturer” position and the manufacturer in the “buyer” position…that is the cost of credit.
That is all a very simplified version! Imagine a salesman trying to explain inflation, the risk premium, the risk free rate of return (that original 2%), etc…Much easier to wrap that up in “COST” and then tell you the “PRICE”. And it sounds a lot sweeter if you hear “0% additional interest”.
Yes ALL car dealers do that (sometimes the manufacture or a government will absorb the interest cost). Mortgages do the same (paying points = the same thing, paying intrest or buying interest. In fact in any finance situation this happens.

 

[angryfafnir]

Of course I realize all that doesnt do much for a dealer or salesman that isnt clear about the costs/fees associated with the purpose. For that you need honesty which appears to rarer than unobtainium these days

 

[madmax12]

Remember the 13% interest rates for a home, 21% for cars? And that was for good credit. When I bought my first house it was 7.75% and I thought I was stealing money!

I spoke with a finance person at a local car dealership, and in our conversation, I was informed that those with bad credit are still paying those high rates. I couldn't believe it.