When Opportunity Knocks…..Early: Part 2

When Opportunity Knocks EarlyAs I wrote on Friday, an opportunity was presented to me that I just had to take.  The opportunity was for me to buy my brother’s Jeep Wrangler.  I just sold my project Jeep Wrangler two weeks ago and have just started looking for another.  I was in no hurry and didn’t plan on finding one for another few months or so.  When my brother told me he was selling his, I just had to jump at the chance.  Since I am planner, this was a little odd for me, but I wanted to take the opportunity and not let it pass me by.

In part one, I gave you a little snippet on how I was paying for the Jeep.  I am not paying cash, but instead electing for a used car loan.  I received some emails about my choice, so I figured I would let you in on why I made the decision.  I mean, I have been in debt before, so why would I do it again?  Let me explain….

My Options

I had two options to purchase the Jeep from my brother. I could have paid it all in cash or I could have picked up a used car loan.  I have plenty of cash on hand, so this was not a problem.  I could have gone to the bank and pulled out the cash and gave it to my brother.  The other option was to pay some in cash and then get the rest as a used car loan.  I thought about my options for some time and even before I thought about purchasing my brother’s Jeep.  Since I was already looking for another one, I knew I had to come up with a payment method in some way.

The Cash Option

This options might be the most desirable for some.  For me, that is not the case.  I love liquidity.  I have more than enough cash to pay for the Jeep with no problem.  The issue for me, is that I like the liquidity of keeping my cash in my various accounts.  I like the piece of mind that is provides.

Since I have more than enough cash to pay for the Jeep, I know that I can afford it.  If you don’t have the cash on hand to pay for a vehicle, then you need to assess the situation fully.

The Loan Option

Sometimes people hear the word loan and they cringe.  I don’t think loans are really that bad.  Why?  They can be used to help you, but it comes down to how you use them.  If you are in debt and looking for another loan, then I probably would consider that a bad idea.  Since I don’t have debt besides my mortgage, I think it is acceptable, especially in my scenario.

I am a member of a credit union.  I got an email from them telling me that they just lowered their used car loan rates.  I decided to log in and see what they were offering.  To my surprise, they were providing loans that were close to 1%.  Now, this is only if you have a great credit score, so it won’t work if you have bad credit.  Luckily for me, I have had a high credit score for years.  Even when I was in debt, my credit score was high.  It gives me a lot of options.

Related: Always know how much to offer on a vehicle.  I have used TrueCar before and I like it.  You can find new and used cars for sale in your area and see how much it should cost you.

I Chose The Used Auto Loan

truecarYep, that is right.  I went with the used auto loan.  The reason I did it was because it call came down to math.  The loan is only two years or 24 payments.  There is no pre-payment penalty and the interest rate is so low that it costs me almost nothing.

When deciding, I thought about where my current cash supplies were.  Right now, I have enough money in one of my investment accounts.  I am not talking about my retirement accounts.  This is only my separate investment accounts though Betterment.  In the one account, I am earning around 7.8% annual returns.  If I take that money out and pay for the Jeep, I lose those returns.  I also have enough cash in a high-interest checking account.  It earns about 1% more than what my auto loan interest rate is.  This will be my backup if my investments take a dive.

It is just basic math, but if you are earning 7.8% and then you have the chance to get a loan for around 1%, then you should take the loan.  I can keep my money in the investment account and for the two years, my money will grow.  My money will be making more money.  If I take it out and put it on the Jeep, then it will lose value.  Since the Jeep is older, it doesn’t grow in value, it only depreciates.  That just doesn’t seem like a smart money move.

If something comes up and I need to pay off the loan immediately, I can certainly do that.  It will take me about 2 days to move the money around, but I can have it paid off immediately.  After digging into the loan option, I think I would be crazy to not take it.  Pay almost nothing for the access to money, which allows me to have my current cash reserves to make me more money.  I can easily afford the monthly payment, so I won’t have to take any money out of my investment accounts.

I am excited to get the Jeep this upcoming weekend.  I will be paying my brother and driving it back home.  Some of you asked on part one about me losing the ability to work on the Jeep.  Since I love working on cars, I don’t get to work on this Jeep as much.  Most of it is done, but if anyone knows a Jeep, they always require work.  I will still get to work on it, but just not as much.  I am looking forward to that. I want to drive it, enjoy it, but still spend time with my family.  These are what are important to me at this time.

So, what you do think?  Would you do the same as me?  Would you get an auto loan if you can get it with little to no interest?

About the Author 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 support company, along with another blog, Eyes on the Dollar, which is another great personal finance blog.

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36 comments
DC @ Young Adult Money says September 30

I would absolutely do the same as you, and have written about this in the past. You really can’t go wrong with that low of an interest rate and are essentially performing arbitrage on our messed-up loaning system.

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    Laurie says September 30

    Thanks DC. Yes, I am performing arbitrage on the loan system, but they give me the option, so I am taking it!

    Reply
Matt Becker says September 30

Your reasoning seems pretty solid. The only thing I’d say here is to be careful thinking about your Betterment account as earning “interest”. Those investment returns are certainly not interest and likewise are not guaranteed. I know you know that, but I just think it’s important to point out because your decision carries a risk with it that wouldn’t be the case if you were truly earning 7.8% interest. Not that it’s the wrong decision by any means. I think your approach sounds like a good one for your situation.

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    Laurie says September 30

    Thanks for the excellent point Matt. I updated the post. I have more than double the price of the vehicle. One portion is in the stock market, the other is in a high-interest checking account that earns about 1% more than the loan interest loan.

    Reply
Laurie @thefrugalfafmer says September 30

Grayson, I would’ve done the exact same thing. You made the right move, in my opinion.

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    Laurie says September 30

    Thanks Laurie. I like to take advantage of almost free money.

    Reply
John S @ Frugal Rules says September 30

We would’ve done the same thing. We did in fact when we bought our last car and got a really good rate. Ultimately, so much of it just comes down to simple math in my opinion. Is it right for everyone- maybe not, but it only makes sense to take advantage of such a good rate if you can.

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    Laurie says September 30

    Glad to hear it John. When you are offered cheap money and can afford it, why would you not take it?

    Reply
Stefanie @ The Broke and Beautiful Life says September 30

I would get the loan as long as my liquid cash was earning a higher rate of return than the interest on the loan. So same as you 🙂

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Michelle says September 30

We have loans on our cars because the interest rate was below 2% on both. That’s hard to beat!

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dojo says September 30

I hate the idea of debt so much that I wouldn’t pay with anything but cash. Ok, I’d transfer the funds from my bank account to the seller’s bank account if I didn’t want to carry the cash myself 😀

If this is a good deal for you and it makes you happy, then it’s all fine. Happy to see you’re pleased with the new car and wish you many happy years with it.

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    Laurie says September 30

    I don’t even consider this debt. I have more than enough funds to cover it, but I am using this as a way for my money to continue making money. I can pay it off at any time. If something bad happens, I will immediately pay off the loan and be done with it.

    Debt doesn’t have to be a bad thing. You can use loans to help you financially. Many of the wealthiest people use loans to further their money

    Reply
MMD | IRA vs 401k Central says September 30

I totally agree with your logic on taking the loan! Very few people look at interest rates in this way and that is unfortunate. It is simple arbitrage. Why not spread your payments out over the long haul if you have a next to nothing interest rate, and then use the money for other potentially higher return investments? Simple but genius.

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    Laurie says September 30

    Thanks MMD. I could not agree with you more. I don’t know why so many people don’t think about this. You can have your money making more money. It is just simple math.

    Reply
Girl Meets Debt says September 30

Interest rate at below 1% sounds too good to pass up. Have fun with the jeep Grayson! 🙂

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    Laurie says September 30

    Thanks GMD. I plan on having a lot of fun with it.

    Reply
Jack says September 30

Personally, I don’t take loans for depreciating assets, it’s just a bad habit I don’t want to develop, no matter the arbitrage opportunities.

Having suffered through many various financial calamities, I understand there are always more on their way. Knowing how much I appreciate cold, hard cash when trouble strikes, I’d rather have less cash and no debt than more cash and more debt. After all, when you hit a point where every dollar counts, watching those debt payments, monthly or lump sum, go out the door just hurts.

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    Laurie says September 30

    The asset depreciates no matter if you pay cash for it upfront or you spread the payments out over time. Since the interest is so little, it’s six in one hand and half a dozen in another. One thing I will note is that depreciation is very different when it comes to Jeep Wranglers. If you have ever owned one, then you would understand that most of them appreciate over time. If you take the time to take care of it and fix it up right, then you will make money. I have done it on the last three Jeeps I have owned. They only got older, but people paid more for them.

    While I certainly understand the premise, if you had a financial calamity and you paid the cash upfront, that cash would be gone. You wouldn’t have it. I only have a small monthly payment that I need to take care of. If I have an issue, I can easily pay the loan off in full (within 2 days) and still be in the same situation as you would if I had paid the cash upfront.

    The only difference is that you are working on the premise that financial demise will happen and I am working on the premise that it won’t happen. We are hedging our bets, but in different ways.

    If you pay the cash upfront, then it doesn’t earn you anything. Let’s say that financial calamity happens a year from now. While you don’t have debt, you have less cash. My situation allowed my money to make me money during that year. If the market keeps at my 8%, then I would be making around $750 just because I kept my cash in investments. My backup funds would be making me more than what I would be charged in interest on the loan making the money essentially free. I can liquidate the account within two days and have the debt paid off. I have $750 more because I had the loan.

    As I said, I appreciate you perspective and thank you for the comment, but using a loan in my scenario is the better bet in my opinion.

    Reply
Jake @ Ca$h Funny says September 30

As much as I hate any type of loans, with interest rates so low it only makes sense to take out a loan sometimes. If you can get a higher guaranteed return on your money than you’ll pay on the loan, why wouldn’t you do it?

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    Laurie says September 30

    I am not a fan of loans either, but this just made mathematical sense.

    Reply
moneystepper says September 30

Seems like a pretty easy decision. People hate debt just because its debt. But if it can make you money, with a very low level of risk, then its the financially sensible thing to do.

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    Laurie says September 30

    I certainly agree with you there. Thanks for the comment.

    Reply
SuburbanFinance says October 1

I’ve never been much of a vehicle person, but if this had been something that I was interested in (ie real estate or.. a vacation maybe) then I could totally understand grabbing the opportunity!

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    Laurie says October 1

    Not everyone is, but glad to hear that you would take advantage of an opportunity like this if you were.

    Reply
Charles@Gettingarichlife.com says October 1

Cash flow is extremely important. I would borrow all day at 1% and loan out and invest at 5-6%. Debt isn’t always bad as you use other people’s money.

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    Laurie says October 1

    I am with you there Charles. Why not borrow and have your money make more money?

    Reply
KK @ Student Debt Survivor says October 1

1% is a great rate, I don’t see anything wrong with what you did and would probably do the same given your situation. I know some people are hard core about never taking on any debt, but in your case you have the money to pay the loan tomorrow if you needed to, so it’s not like you bought something you can’t afford. Plus you’ll make a nice little spread if your rates stay at same. I think that’s a win-win.

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    Laurie says October 1

    Thanks for the comment KK. I agree with you. I think I can make some money the way I did it. If the market crashes, then at least I have my other account that is earning more than the loan interest, so I will still win!

    Reply
Kim@Eyesonthedollar says October 1

I think you weighed the options and made the right decision for yourself and your family. That’s really what personal finance is all about .

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    Laurie says October 2

    Thanks for the comment Kim. I certainly did weigh the options and this one worked out the best for me.

    Reply
Budget and the Beach says October 2

I would have probably done the same thing. As long as the loan is reasonable you might be making more in interest if you keep the money in your account, or like you said it’s peace of mind.

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    Laurie says October 3

    It is both for me. My current cash can make me more money than it costs me to take the loan and I get the liquidity.

    Reply
Marissa@Financetriggers says October 6

I am against loans of course but would probably do the same as you did, with an interest rate that low! Good for you!

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    Laurie says October 6

    I am usually against loans as well, but this was just too good to pass up.

    Reply
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