Financing a Rolex

[Rookhawk]

I thought I'd put this thread up since lots of people have discussed this over and over in different threads with much EMOTION.

I thought I'd just run through some of the scenarios that play out to give perspective on the actual negotiating concepts, the objections and the financials that play out with 0% financing over cash.


Point 1:

0% financing. How it works, who pays the cost?

0% financing is typically offered for a year as somewhat of a tease at different jewelers to get you into a new Rolex or other luxury good. There are two ways that 0% is handled from the ADs perspective that you need to be aware of.

Method 1: The AD purchases a "buy down" through a financing company that is charging 15%-29.9% interest on an unsecured, revolving credit line. The dealer may have to pay 10-20% of the principle balance to offer this teaser so if you can identify these dealers you may wish to negotiate instead for the deduction on purchase price with cash to avoid having this finance charge absorbed by you the customer.

Method 2: The AD may partner with a company that will offer the credit at no cost to the merchant in return for somewhat predatory fine print in the contracts. Meaning, the creditor is going to create a 0% option that relies upon many people accidentally missing a payment or violating the terms so that the fees are back calculated to the day of purchase at 29.9% or more. Be wary of these contracts and read them thoroughly because they are cunning lenders that are hoping for an ideal customer: someone with great credit that accidentally misses the payment so you do not default on the debt but instead pay usury rates.

Point 2:
Does 0% financing help or hurt my credit?

Generally speaking, taking out new credit is a double-hit to your credit worthiness and credit score the day you take out a loan. Hit one is a voluntary credit look up (depending how many you make this could be minimal or moderate impact) and then you take the hit in that your debt to available credit takes a sizable hit. 0% financing options are calculated by Fair Isaac and the three bureaus like other revolving debt, mortgages and student loans. When you get to the point where you have say a $10,000 purchase paid down to only $2000 remaining balance it often is tabulated by the bureaus as though you have a line of credit where you could go back and charge up another $8000. (original balance) When you are ticking down the debt the negative hit to your credit balance available converts to a positive on your overall credit score. I personally do not recommend financing luxury goods under the hypothesis that you're doing great things for your credit score.

Point 3:

What is the real value of using 0% financing assuming you're not paying more for the goods to receive the 0% credit benefit?

This is a simple calculation called "Present Value". Lets take an example of our beloved "Hulk" 116610LV Submariner with an MSRP of $8550 USD. If you were to purchase that watch at face value with 0% financing for a year, the actual power of the money you avoided paying (assuming you can use that money elsewhere and earn 8% return annually) is surprisingly low. If you only have one balloon payment of the $8550 at the end of the 12 months, the PV of that money is only $7,916. So the 0% financing for a year in our example saved you $634 ASSUMING you can go out and earn 8% interest on that $8550 for the entire year. Alas, you likely cannot.

Usually 0% financing requires equal monthly installments so you'll make $712.50 payments every month for a 12 months to complete the $8550 you owe. Under this very common method, assuming you're going to use that $8550 to earn you interest in investments at 8% per year and you'll make that $712.50 per month at 0% and pay off that $8550 at the end of 12 months, this is what the Present Value (PV) of that $8550 0% financing scheme really is: $8191. So you've saved/made $359 in a year assuming you actually earned 8% on your money instead of paying $8550 cash and walking out of the AD with the watch sans financing.

Point 4:

Cash is king. If you can negotiate with your AD, typically they will give you a greater discount for cash than a credit customer anyway. A few reasons:

1. Salesperson can conclude a cash sale faster
2. Salesperson has 100% chance of consummating a cash sale, whereas a credit check and lots of wasted time can occur with a customer that can't get the credit. (opportunity cost is higher)
3. The AD may have to pay something for the 0% or other financing option anyway.
4. Small ADs may doctor their books on cash sales and cheat the IRS. (not your problem but Cash is King and it makes people do things)

Point 5:

Random negotiating errata.

A.) If you have good credit and don't have a good credit card, go get one. Fidelity offers an Amex card that pays you 2% cash into your brokerage account (they set one up free) on all charges with NO LIMITS. If you get down to a cash deal at an AD, try to swing in on them that you use a CC instead. If they tell you yes, you made 2%. If they want to charge you 1%, you arbitraged $85.50 on your $8500 Hulk purchase in the example above.

B.) Keep in mind, if they agree to the same price cash or credit, you should be countering that they discount your cash price another 2% because that is what it costs the AD to ring the charge through the machine.

C.) Buy what you can afford.

D.) Many people believe in only financing homes and not luxury goods. The reason for this thinking is that it is a good idea to finance secured debts at low interest rates (e.g. 30 year mortgages at 3.5%) under the idea you can make more on your money in the market. You typically cannot earn as much on investments as the fees you'll pay on revolving debt or unsecured financing, hence it is shunned by savvy investors.

E.) Realize how small the benefit of 0% financing is in real dollars. You must then reconcile that with the likelihood and impact of you making a late payment and getting hit with a huge, huge rate/charge/penalty. All it takes is one payment lost in the mail or received a day late and that paltry sum you saved with 0% financing became an enormous penalty turning your $8550 purchase into a $11106 spend!