Finance Question (Loan)

[Ster]

Why would a person want to pay for the ATV in cash when they can get a 0% loan and keep the money in the bank as long as possible? Even with a non-Kasasa saving earning 0.1%, that 0.1% return is still more than 0% by paying cash.

Because if you own it outright you dont have to worry about losing your job or something else to keep you from missing a payment. You never know what might happen.

I still don't agree.

Scenario: I have $6000 to go out and buy a new ATV and I can get a 0% financing. If I pay the ATV outright, I'm out of $6000 and have zero dollars in the bank. If I finance it, I still have say $5000 in the bank. A month after I get the ATV I lose my job. I still have $5000 in the bank to pay the note with all while the $5000 in the bank is building interest.

The biggest thing is discipline. Just because I financed the ATV, that wouldn't mean go out and blow the remaining $5000. If so, then that would equal to your statement, because I would be back at zero dollars in the bank. This is where I feel a CD comes in very handy, because you can borrow against it and you never "see" the money or have access to it to spend it.

Mathmatically speaking you are correct assuming that you are doing something productive with the $5,000. Same principle applied to a home Mortgage. A 15 year Mortgage is best if you aren't disciplined enough to invest soundly. If you are disciplined to invest you come out much better off with a 30 year mortgage and investing the difference in the 30 ym and the 15 ym. However, if you are going to just spend the difference and not invest in an interest bearing environment then you are better off paying the mortgage off early with a 15 year contract.

The way I look at my money, is that I want to keep my money in my bank account as long as possible. Monthly bills get paid just before their due date. Why, because I'm making interest on my dollar as long as it is in my bank account and not someone else's. If I pay the bill as soon as I receive it in the mail, then I loose out on potential interest.

[Ster]

Why would a person want to pay for the ATV in cash when they can get a 0% loan and keep the money in the bank as long as possible? Even with a non-Kasasa saving earning 0.1%, that 0.1% return is still more than 0% by paying cash.

Because if you own it outright you dont have to worry about losing your job or something else to keep you from missing a payment. You never know what might happen.

I'm going to challenge you to think outside your conventional thinking. I think the same way you do but....

In the great depression had more people had their homes financed there would have been more cash (in theory) to circulate. What happened was everyone lived by "old school" standards. If you can't pay for it in cash, don't buy it. So their cash was tied up in a home that had A. lost significant value 2. no one could afford to buy. So they were stuck with a property that was paid for but had no "liquid value". Some people argue that had those properties been financed and the owners had savings they could have walked away form the note, leaving the bank to take the loss. The banks were already going out of business so another default wasn't going to hurt.
So if you apply those principals to the ATV scenario. Why put all your cash into it, lose your job and either not be able to sell it or have to take a loss on it. Or finance it, keep your cash, lose your job and have to sell it or let the bank repo it.

I know it's twisted and maybe even unethical but it's a unique concept. I had never thought of it until someone way smarter than me started explaining it to me one day.

And no, I don't support this thought process. I just like twisting things up a bit and seeing what others think.

As for borrowing against a CD, I think it is a good way to save your cash adn buid your credit. I advise clients with "immature" credit to do it all the time. It's just buying your credit score, nothing wrong with it.

Financial planners run into this situation all the time. Say a very successful person at the age of 55 decides he wants to retire at the age of 60. He visits his financial advisor and tells him they want to retire.
The Financial planner asked "well how much money to do you have?"
The client responds, "I have about $50,000 in the bank, but I am debt free. Don't owe anyone anything?"
FP: "that's great, but how $50,000 going to support you for the next 30 years of your life while you are retired?"
Client: "Well, it says here I'm worth almost 2 Million bucks"
FP: "Yes, that is because you own your home, your land, your second home, your cars, jewelry etc..." "But, how is your home going to send you a check when you are retired?"

Do you see the problem? The only thing that gives you money when you are retired is a large pile of money. So what do you think the FP tells the client? He would tell them pull out all of the equity out of the home and then invest the cash in something that can grow more money.