I don't want to appear insistent, but our company receives offers of lines of credit regularly from the banks we use and from other sources. These lines of credit have an interest rate associated with them. What we are talking about here is free money, zero interest rate. This is highly unusual when the benefit offered for paying cash is a measly $1,000 on tractors that can cost upwards of 40K. Anyone that has cash in that amount would be extremely foolish to tie it up for a depreciating asset when that same cash, invested, can earn even a 2 or 3 percent rate of return (and that can be had with a CD). Even put in a 2% CD, 40K in 5 years will earn you $4,000. Why would anyone take accept a discount of anything less than that for paying cash.Come on folks, it isn't rocket science.
OK. Now what you are saying makes more sense than that rude 5 percent & "rank amateur" comment. I agree that the CD payment analogy and also think that it is an excellent place to start. But I'm going to argue that it still isn't that simple. BTW, I think that these discussions have a lot of value even on a tractor forum.
Tractors are expensive long term purchases. And like it or not, all of us have to be a lot more sophisticated and involved in our own finances now than ever used to be the case.
On the CD shouldn't we also consider the time value of money and also taxes? After all, the government is going to take a major bite out of whatever we get from the CD. So it isn't $4000 profit. More like $3000 and might even be closer to two. Then there is inflation. For years now the purchasing power of money invested in the CD has been declining faster than the CD is earning interest. And that's a real BIG problem....
Personally, we don't consider our tractor as a financial investment. It is much more valuable than that. Tractoring is a hobby and pays interest in the form of health, not dollars. I love to do outside projects and believe they are good exercise if one avoids the heavy straining. My father spent the last 20 years of his life nursing a bad back caused by a lifetime of too much lifting, bending, digging, and toting. The way I figure it, the price of a loader tractor to help do these things and save my back in the process is a good investment. So does my wife. In fact, she's the one that insisted on a brand new tractor.
So since our investment is more in health than dollars, it makes sense to just buy the thing instead of endless worries over price. What we did was to negotiated a cash price with every intention of paying with cash. That took about a month of visits. And when the price got down close to what I figured the dealer had into the tractor we threw in a few things that mattered to us but which didn't cost the dealership much - like an extended warranty - and called it a deal.
And when the salesman airily remarked that it didn't really matter to him whether we paid cash or took the 0% payments...well, of course we immediately took him up on the payments and invested the cash ourselves.
Shucks, we aren't stupid....
BTW, we use lines of credit in our business too. And I agree with you that maintaining lines of credit is a completely different subject. Instead of simply financing the purchase of a tractor, it becomes financing the purchase of a loan to finance the purchase of a tractor. There's a point where the complexity of the loans overwhelms the small amount of money to be saved.
Unless it's a hobby of course.
rScotty
