Autos

The Jeep Financing Experiment Has Ended!

My New Jeep ProjectWell, four months after the experiment started, I ended it last week.  Yep, I paid off my Jeep Wrangler loan and now I want to discuss the results of my experiment.  I spoke back in September about how an opportunity came about when my brother was selling his Jeep Wrangler.  I split up the story into part one and part two.  I have been a fan of my brother’s Jeep for some time.  He knows what he is doing and his Jeep was awesome.  I had just spent a year fixing up another Jeep and it was just not where I wanted it. It was going to cost me thousands more to get it to where I wanted it.  On top of that, the bones of the Jeep were just showing too much wear.  It was a 1990 and had seen better days.

I had decided to sell my Jeep in order to search for another one that had some better bones.  I sold my Jeep in 24 hours after listing it on Craigslist.  It was an easy sell and I had made money on it.  I bought my Jeep in non-working order and was able to make a profit of about $1,500.  That worked for me.  that same week was when I found out my brother was selling his Jeep.  I knew I had to take advantage of it.  The price was a little higher than I wanted to spend, but I had to take into account the amount of work I would need to do and parts I would need to buy.  I didn’t have to do anything with my brother’s Jeep. His was lifted and already kicking ass.  It was an easy sell for me and him!

I Chose To Finance The Purchase

I had more than enough cash to pay for the Jeep outright.  That being said, after I started looking around, I noticed that I could finance it for very little.  The interest rate that I got was so low, that it just made sense.  Well, after I wrote about the opportunity and how I was going to pay, I got some hate mail.  People were upset that I ran a blog focused on debt and I was incurring more.  I guess I can understand their frustration, but they didn’t read the many things in the posts about why auto financing was right for me.  I chose to finance the Jeep because I wanted to have my cash liquid.  I wanted to do some things with it.  One of those things was to try an investment experiment.

My Experiment

The investing experiment was pretty easy.  Here is how I did it.  I financed the Jeep for $7,000 at an extremely low rate.  I took $7,000 and put it into my new Scottrade account.  I then took another $7,000 and put it into my high interest credit union checking account.  Now, you are saying “high interest? Really Grayson?”  It does sound like a little misleading since there are no real high-interest checking accounts, unless you go to a local credit union.  There is a credit union here that gives you 3.5% interest when you do 12 transactions per month. I do just enough to make that limit and do nothing else.  I put enough money in to cover those transactions to make sure that my $7,000 stays constant.

Since I was making more in my credit union checking account, I knew that I could afford to run the investing experiment.  That was my fail-safe.   If my investments crashed, then I would still have made money.  That is the beauty of having a high credit score.

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I opened my Scottrade account and invested into some exchange-traded funds (ETFs).  They are easy enough and I can create some diversity.  I have been happy with the ETFs that are in my Betterment account and I am at 11.5% returns this year.  I had planned to run the experiment for at least a year, but something came up.

My Debt-to-Income Ratio

As I have discussed in my 2014 goals post that my wife and I are looking to sell our home and buy a new one.  It is going to be a lot of work.  We are focusing on selling our current home first. We will then focus on buying a new home.  We both have high credit scores, but with the loan, my debt-to-income ratio (DTI) was just a little higher than I liked it.  If you have a high DTI, then it can be hard to get a mortgage. I don’t have a high one, but having a loan on it just makes it higher.  So, because I want to get the best mortgage rate possible, I paid off the loan.

The Results

Alright, I am sure you want to know the results of my experiment, right?  OK, here they are.

4 Months of Loan Interest: $24.49
4 Months of Investing Returns: $434
Profit/Loss: $409.51

Ah, yes, my investment experiment was a success in my book.  I made $409 in four months by just keeping my money in the stock market.  I can’t and won’t complain with that.  So, for those that got all uppity with me about my decision, I think that you can now say that I made a smart move.  Even if I didn’t make a profit, I had a fail-safe that still made financing a smart move.  I said it before and I will say it again, you can use credit to your advantage and many of the richest people in the world have done it.  It just take discipline and understanding of what you are doing.  I fought debt once and have learned a lot.  Now I am growing my wealth and am not afraid of using credit wisely to do it.

Update: Let me indicate one thing that as been brought up in the comments and through emails.  I never  have and never will suggest that my experiment is how it should be done or is what you can expect when you invest.  I realize that four months is a short time period when investing, but I still made money.  That is what makes it a success.  Even if I lost the money, all of it, I still would have made money with the cash stored away in my checking account.  If you read my original posts, which I linked in the beginning, then you will know that I told people that financing at a super low rate allows you options with your available money.  You can do whatever you want with that cash.  I wanted to test the stock market.  That was the option I chose.

Just as a gentle reminder, I don’t recommend doing this if you are struggling with debt. I learned how to use credit wisely and understand my situation much better than anyone else. I also understand my mentality.

So, what do you think of my experiment?

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Grayson Bell

Grayson Bell

I'm a business owner, blogger, father, and husband. I used credit cards too much and found myself in over $75,000 in debt ($50,000 in just credit cards). I paid it off, started this blog, and my financial life has changed. I now talk about fighting debt and growing wealth here. I run a WordPress maintenance and support company, along with another blog. It is Empowered Shopper, which helps people get information about products they want to buy. You can also check out Eyes on the Dollar, which is a great blog that I co-own.

44 Comments

  1. January 29, 2014 at 7:10 am — Reply

    Not bad! Thanks for sharing, sounds like an easy win for little effort.

    • January 30, 2014 at 12:01 am — Reply

      I think so. Since I had a fail-safe, I wasn’t afraid of running the experiment.

  2. January 29, 2014 at 7:44 am — Reply

    Excellent work, Grayson! We are probably going to be in the market for a newer vehicle within the next 1-2 years and we have spent a ton of time going back and forth on whether it’s better to pay cash or take the low interest rate financing if we could get it. I think we’d probably do something similar to what you did, except we would be looking at probably buying from a dealership and the big bonus of taking the financing option there is that you can often get a break on the purchase price if you finance through the dealership. Then we’d probably pay it off in short order (or maybe immediately, we’re still debating). 🙂

    • January 30, 2014 at 12:02 am — Reply

      Most people will tell you that it is better to pay cash and I agree to a certain extent. If you know how to play the arbitrage game, then why not do it?

  3. January 29, 2014 at 8:25 am — Reply

    Slick, Grayson!! Sounds like your experiment worked perfectly. Great job. 🙂

    • January 30, 2014 at 12:02 am — Reply

      Thanks Laurie. I was happy in the way it turned out.

  4. January 29, 2014 at 8:36 am — Reply

    I definitely think it’s smart to take advantage of auto financing, especially if the interest rate is low. I know that others are totally opposed to this idea but if you run the numbers it just makes sense to finance in my opinion.

    • January 30, 2014 at 12:03 am — Reply

      Sometimes it is hard to tell math that it is wrong. Math was very correct in this scenario.

  5. January 29, 2014 at 9:14 am — Reply

    I wouldn’t want to finance a car, simply because I don’t like bills. But it makes sense in your case. If you got an incredibly low interest rate, it might be wise to put your cash elsewhere.

    • January 30, 2014 at 12:03 am — Reply

      I don’t like bills either, but I do like making easy money. Since this was an experiment, I wouldn’t do it all of the time.

  6. January 29, 2014 at 9:44 am — Reply

    Nice work Grayson, especially being able to take advantage of what the market was doing last year. I’m not a fan of car loans personally, but have had them and likely will again assuming I can swing a nice rate. If you can get a good rate and use your cash to do something better with it then it’s a no-brainer in my opinion.

    • January 30, 2014 at 12:04 am — Reply

      I got a phenomenal rate that I don’t think most people can get. Since I had more than enough to cover the car, even after investing, this was an easy experiment.

  7. January 29, 2014 at 9:57 am — Reply

    You picked a good 4 months to be in the market! (Retrospectively.) It’s still too risky for some – or most, on that short time horizon – but I might be game for it depending on the loan interest rate. We have some 0% money in the market but that’s on a 3 year timeline. I’m glad it worked out for you!

    • January 30, 2014 at 12:05 am — Reply

      I agree there. That was why I put the same amount in a checking account that earns interest. That was to be my backup just in case the market went down.

  8. January 29, 2014 at 10:48 am — Reply

    I love this experiment and you proved a point I talk about with clients frequently. Debt does not have to be bad, it can be strategic. With interest rates so low right now, it is relatively easy to get a great arbitrage on your cash. And if you can make more investing, then you are better off doing that then paying off debt.

    • January 30, 2014 at 12:05 am — Reply

      Thanks Shannon. If you understand how to do it, then you can make debt work for you. It is a simple concept.

  9. January 29, 2014 at 11:01 am — Reply

    Nice job, and you got a sweet ride to boot. I’m unsure if I’ll ever finance a car; like others said, I’d rather not have to deal with the bill, but sometimes the numbers do make sense. Hopefully I won’t have to make that decision for a while!

    • January 30, 2014 at 12:06 am — Reply

      Thank you! While I hate bills, I do like making money and that was the point of the experiment.

  10. January 29, 2014 at 11:29 am — Reply

    It looks like it worked perfectly for you. I agree that you can use credit wisely. As long as you know what you’re doing it should not be an issue.

    • January 30, 2014 at 12:06 am — Reply

      Thanks Raquel. Many people think credit is evil and I used to be one of those, but my mindset has changed.

  11. January 29, 2014 at 11:55 am — Reply

    Congrats Grayson! And that is a really cool ride btw. I do the same with my mortgage but haven’t figured out how much money I have made. Part of it is on a 3% savings account while the mortgage is at 2.29% and the rest is invested. I love low interest rates.

    • January 30, 2014 at 12:07 am — Reply

      I appreciate it Pauline. I wish I could get a mortgage for that rate!

  12. January 29, 2014 at 1:56 pm — Reply

    The $400 or whatever is great, but more importantly that’s one BAD ASS JEEP!

    • January 30, 2014 at 12:07 am — Reply

      I am going to have to agree with you J. Money! I do think it is a badass Jeep and it is fully equipped!

  13. January 29, 2014 at 11:41 pm — Reply

    Lucky you were invested in the up market of 2013 and not in the current down market. As we all know, the stock market can go any which way over only 4 months. I’m glad you came out ahead.

    • January 29, 2014 at 11:42 pm — Reply

      P.S. Nice jeep!

    • January 30, 2014 at 12:08 am — Reply

      I agree there. That was the reason for having the amount invested also sitting in a checking account. I could keep my money invested and just ride it out, but use the other cash to pay off the loan.

  14. January 29, 2014 at 11:58 pm — Reply

    I think it’s really cool that you actually ran the experiment. We bought a new vehicle about a year ago and got super cheap financing…We decided it probably made more sense just to finance the entire cost.

    • January 30, 2014 at 12:09 am — Reply

      Sometimes it does. If the math works out and you want to keep your cash liquid or run an experiment like mine, then financing is OK.

  15. January 30, 2014 at 1:41 am — Reply

    Why only 4 months? Why didn’t you spread it out? Sure, you had a good 4 months, but in any given 4 month time period, you’re more likely to come out ahead. Even at 3.5%, you could have kept going with this strategy. Why didn’t you?

    • January 30, 2014 at 8:57 am — Reply

      Hey Daniel, I indicated in the post that my wife and I are trying to buy a house. Because of the loan, my DTI was a little higher than I wanted. I want the best rate possible, so I had to end the experiment. That is the reason for only 4 months. I was planning a full year.

  16. January 30, 2014 at 9:02 am — Reply

    I definitely agree with you that debt can be used well in the right circumstances, and getting 3.5% on a savings account when you’re paying less than 1% on the debt is definitely a good move. But I wouldn’t count 4 months of good stock market returns as an indicator of success. I get that it worked out, and as a long term move I think it can be a good decision, but I would just be careful about suggesting that people should expect any random 4 month period to produce such solid returns. 4 months is a total crapshoot and expecting to win over that timeframe is, in my mind, the equivalent of gambling.

    Again, I get that your plan didn’t solely rely on stock market returns so I’m not knocking your specific approach. It’s just the conclusion that I would be careful with.

    • January 30, 2014 at 11:26 am — Reply

      I never told people that they are always going to be making money doing this. This was an experiment that turned out to be a success. The premise is still solid. If you can get a low interest rate, then you can think about financing. You don’t even have to invest in the stock market. The original posts indicated that financing can be leveraged to keep your funds liquid for some other purpose. My purpose was to test out investing. In making the $400, then I have to say the experiment, no matter how long it lasted, was a success.

      Again, I expected to do the experiment for a year, which if I was in this year, then I would have made 11% back, which is what my IRA funds made. The only reason why I invested was because I had the back up checking account making more than the loan rate. That was the main reason why I invested. I had the back up to test the method.

      Again, the purpose of the experiment was to tell people that financing is not as bad as it is made out to be. If you know how to do it, you can leverage low rates in your favor. That was the purpose and that is what I indicated to everyone.

  17. January 30, 2014 at 11:04 am — Reply

    Hmmm, you’ve possibly changed my mind about how I’m going to buy a car. I’ve been pretty much in the buy it in full camp, but I’ll have to do some more investigating. Luckily, I won’t need one for a while (not until I leave NYC). Nice that you took a gamble that paid off!

    • January 30, 2014 at 11:27 am — Reply

      I am only trying to open people’s minds that financing might not be as bad as it is made out to be. If you can get a low rate, then you can leverage it to do other things with your money. I wanted to invest as an experiment, but that it not the only thing you can do with it. There are options and low rates keep those options open.

  18. January 30, 2014 at 4:01 pm — Reply

    Freaking. Awesome. So….I think this may contribute to the ongoing debate in the PF blog space – is there good debt? The answer is YES, if you do it right… 😉

    • January 30, 2014 at 4:06 pm — Reply

      Thanks Brock. That was the point of the experiment. Even if I didn’t put that money in the market, I was earning more in my credit union checking account than the cost of financing. It just made sense and allowed me to use my other cash to test out investing. Yes, I did have to cut the experiment short, but I still made money!

  19. January 31, 2014 at 1:41 pm — Reply

    I think the experiment is valid, but I do think that the idea that investment returns have risk attached to them. Depending on the time you invest the money, you might actually have a negative return. That is why I prefer not to have debt, but it is great to see that the experiment worked in your favor.

    • January 31, 2014 at 3:27 pm — Reply

      Of course there is a risk attached. If you don’t take any risks, you don’ get any reward, right? That being said, I had the backup money that was there just to pay off the debt. There was a reason why I put the same amount of money into my checking account (earns more than the interest paid on the loan) and in my investment account. The purpose was to show that if you are smart about financing, then you can leverage your money to do anything you want with it. You don’t have to invest, but that was what I chose to do.

  20. February 2, 2014 at 1:41 am — Reply

    I am intrigued by the experiment but I find that it would be too much for me to think about in the long run.

    • February 3, 2014 at 10:22 am — Reply

      That is understandable. I am a long term planner type person, so experiments like this work out for me, typically!

  21. February 4, 2014 at 4:12 pm — Reply

    Wel done Grayson! It’s called an experiment for a reason, right? I’ve got a jeep too, iand it’s great to have in the summer, but it’s my daily driver, so it can get a little loud and cold in the winter. It’s still pretty BA though!

    • February 4, 2014 at 4:32 pm — Reply

      Thanks Ryan. Yes, it is called an experiment for a reason. Thanks for understanding the premise. I am glad that my Jeep is not my daily.

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