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!

[floater156]

I tried reading this but zoned out after three paragraphs.... sorry!

[horseco]

WOW !!! thats a lot of questions...

[Rookhawk]

I agree, it's exceedingly boring and I'm the author!

I just got sick of the emotion and the banter about this topic going over and over again on the forum. I posted what I believe to be the facts. Many will know what the facts are already (cash is king) and act accordingly, others will say "but I want it now even though I can't afford it" so the above info can help them calculate the true cost of their impulses.

People do incredibly silly things because they don't understand Present Value and Opportunity Cost.

[masterserg]

Interesting thoughts, especially in Point 1. Funny enough, I got my LV C at an AD at full MSRP a few months shy from a year ago (damn time flies) ... there was no way they were going to give me a discount but they were pushy with 0% financing (which I declined)...so Method 2 makes sense. I mean, obviously nobody offers you 0% because they are nice or have your well being in mind ...

PS, I don't think it is boring ... Not many people know the facts.

[SaddleSC]

Oh boy...here we go again. These financing threads never end well. If you are against it, then pay cash. If you are for it, then borrow up to your eyeballs. But no amount of logic will sway either camp, so it is a fairly pointless discussion.

Those convinced against their will are of the same opinion still.

[azguy]

Buy what you can afford and then it doesn't really matter if you pay cash, finance it at the AD or use a credit card

I have bought many high priced items on credit and via credit card simply becuase I do not want to outlay current cash when I knew I had a big pay day coming a few months down the road

[masterserg]

Originally Posted by SaddleSC

Oh boy...here we go again. These financing threads never end well. If you are against it, then pay cash. If you are for it, then borrow up to your eyeballs. But no amount of logic will sway either camp, so it is a fairly pointless discussion.

Those convinced against their will are of the same opinion still.

This is very true too.

[chicfarmer1]

Originally Posted by Rookhawk

People do incredibly silly things because they don't understand Present Value and Opportunity Cost.

I 'm sure someone might benefit from this type of analysis, but most of us here have been around the block with a wallet over time and sort of get what fits and what doesn't. And furthermore, people act from emotion legitimately, not only superstitiously. For many, increasing debt is something that is both unnecessary and doesn't feel right. And for others, taking on debt is the cat's pajamas...so it goes.

[astrazen]

Sorry, Im sure there is some valuable learning in there somewhere but I've lasted these last 40 years without analysing my purchases this much.

[superdog]

Impressive post. Thanks for taking the time to put it together. Sadly, most people won't actually read it because it takes to much work.

[psv]

Originally Posted by floater156

I tried reading this but zoned out after three paragraphs.... sorry!

I didn't last that long.

I don't believe in financing anything apart from my house. Cash is king. If you cannot swing that without meeting all other financial obligations, including savings, then don't spend your money on something like watches.

[FX44]

Originally Posted by SaddleSC

Oh boy...here we go again. These financing threads never end well. If you are against it, then pay cash. If you are for it, then borrow up to your eyeballs. But no amount of logic will sway either camp, so it is a fairly pointless discussion.

Those convinced against their will are of the same opinion still.

Agreed

[SLRdude]

I save and I pay cash.

Took me several years of savings to pay for each of my two Rolexes as I am a one income household, one that works for corporate America and does not make lots of money.

It's just one of those things I refuse to finance. It's a luxury and not a need and as such I will make myself work hard for it. If I cannot save it... I don't get the watch.

[amani]

very interesting info indeed, and i will definitely read it over and over again. About the 8% annual return i am a little conservative about it. its true that if you have the knowledge or skill, or enough saving, some investing company can give you 30% annual gain depends on the profolio. but majority of us are just average joe and good luck with even 1% annaul gain. for such a high annual gain you need a significant amount of saving for admission. most of us dont have the knowledge to make money with money, and the invester dont even bother to watch your account if they have other accounts contains millons of dollars in it to get more comission. to me, a luxary watch is never a necessity. breaking down the payment for an non-necessity to make it "affordable" is never a wise move. however if you can pay it off, then 0% will be good because you can keep your $$$ in your pocket, just make sure no late payment though. Affordibility means something without a sweat but its all relative. to me i can buy a $50 purse no sweat but $800 purse i have to think really hard, then $800 is consider expensive for me. this is my guideline for affordibility.

[Rookhawk]

Amani,

I tend to agree with you, I was just pleasing the folks that think they can pull off the 8% consistent year-over-year return. (which most experts can't unless averaged over 30 years of highs and lows)

If you think you can earn 5% a year on your money, you know what your $8550 watch 0% financed for a year actual saved you by financing? $227.13, or a present value of $8,322.87.

It makes the calories burned to juggle finances for that extra few pennies seem very petty to me, but then again I'm one of those "cash is king" guys anyway.

[Lion]

Thanx for the info it was interesting but I will never finance luxury goods. I am one that will do with out until I can pay in cash. To me a watch is a "want" and not a "need". Needs are food, clothing and shelter...everything else is a want. They only areas I do not use this rule is when buying a car or a house...as it's difficult to do nowadays. But I also will not spend above my means either. To those who want it now that's your choice and good luck with it!!!

[amani]

Yes, tell me about it, but I guess $ is $, $200 is still money. as life gets harder and harder, every penny counts, while others just find it as a hobby/habbit and feel superior at the end of month in getting $2 rebate from a gas card. a CPA friend of mine (male btw) just enjoy paying the bill with his card after our group gathering and we pay him back with cash just to squeeze every penny out of that 2% rebate. Its totally a talent to me, me? just incapable

Originally Posted by Rookhawk

Amani,


It makes the calories burned to juggle finances for that extra few pennies seem very petty to me, but then again I'm one of those "cash is king" guys anyway.

[LightOnAHill]

I read the whole thing. The last sentence was good, rest was informative and some people should read it, but some will still take the risk despite... live on that wild side I guess!

[Timber Loftis]

Originally Posted by Lion

Needs are food, clothing and shelter...everything else is a want. They only areas I do not use this rule is when buying a car or a house...as it's difficult to do nowadays.

Most people finance wants. As you point out a car is more of a want than a need. Especially as you go up in price. You may *need* a car to get to work, but you don't need a newer model high end one. Still, people finance these. And "shelter" may be a need -- but most people finance the house they *want* which usually far, far, far exceeds their *need.*

But hasn't this horse been beaten pretty well already?

[rr-nyc]

Thats quite a post!

Originally Posted by Rookhawk

Point 1:

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.

Although I have never heard of this type of retail credit card setup, I'll give you the benefit of the doubt although I fail to see how a dealer benefits and why any store would even promote such a deal when the bank is the only one making out. As a consumer, I negotiate my deal before deciding my payment method. Using this method, form of payment would be the first question the sales person would ask.

Originally Posted by Rookhawk

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.

This is how it's usually done and its 100% legal and nothing is wrong with it. Its called deferred interest. The interest is accrued from day one but deferred if the balance is paid off in the time frame stated. There is nothing deceptive about it. If you're old enough to sign for a credit card and able to read basic English, you have no recourse if you can't follow a simple agreement. Pay on time and pay off in the promotional period, you pay no interest. Fail to do so means paying interest from day one.

Originally Posted by Rookhawk

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.

This is a great point for credit score information but I don't see how this is remotely important to the 0% financing issue. Those who finance the "important" stuff like homes, cars and education do so once every several years. The inquiry could drop off by the next time they need to run credit and the balance can show zero which can improve your score.

Originally Posted by Rookhawk

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.

You're assuming someone is going to put this money in a saving account or a CD? Of course they won't make 8%. In a worst case scenario, someone can take this cash and pay off one of their high interest credit card or make a large payment for their car or home. They can make the monthly payments out of their pocket throughout the promotional period. Saving 15-29.9% in credit card interest is still cost savings.

Or, you can invest the money. Index funds are going through the roof. ProFunds Bitotech index fund is running +29.99% YTD and +53.22% 52 wk. Bottom line is that if you make $1 off that money, it has a positive rate of return.

Originally Posted by Rookhawk

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.

You're confusing a revolving line of credit with an installment line of credit. Two different things. An installment account requires you to make equal payments throughout the term of the loan. Thats not the same thing as a revolving line of credit that allows you to make a minimum payment.

Originally Posted by Rookhawk

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)

To a sales person, there is no difference between cash or credit. A credit application takes 30 seconds and if it means getting a sale or not, they'll take the 30 seconds. To an AD, there are higher costs associated with major credit cards so this provides them with another way of getting a sale. I for one might pay "cash" for an item but I don't walk in with $100 bills. I can put it on a debit card or a credit card and pay the balance off immediately.

I will use my own experience so there is no disputing fact. I was at Tourneau inquiring about and EXPII which they didn't have in stock. I tried on a GMTIIC. We looked at the price tag and she took out a calculator. She figured out 10% off and turned the screen towards me. She then asked if I had a Tourneau card and I said no. She told me that if I open up an account, they are offering 18 months 0% and get 20% of the purchase price back on a Tourneau gift card that can be used for anything in the store including service. So if I paid cash, I'd walk out with only 10% off.

Companies offer store credit cards because its a customer retention tool for them. You are more likely to buy from them again if you have a credit card that can be only used in their stores. If you get a Banana Republic credit card, you will buy clothes at Banana Republic. Any other benefits are secondary.

Bottom line is either you believe in financing or don't and thats fine. One thing is for sure, 0% financing in the US is not a shell game or some scam like another member tried to imply. It's exactly what the term states: 0% interest for 18 months means it's 0% interest for 18 months. If you take 19 months, you are paying 19 months of interest.

[MoBe]

Thanks for spelling it out Rookhawk.

I have not been able to independantly confirm that,in the case of a 0% credit issuer,there is a fee to the retailer when there is no default by the debtor,in other words,a transaction fee.

Can you comment?

Apparently there are still people that want to believe that a bank or credit company will lend a consumer money simply for the asking without asking for anything in return.When it comes to buying a used watch we are constantly reminded by other members of the forum,"if it sounds too good to be true then it is",yet when it comes to finance we should believe that free money is a reality,you must be joking!

[masterserg]

Originally Posted by rr-nyc

One thing is for sure, 0% financing in the US is not a shell game or some scam like another member tried to imply. It's exactly what the term states: 0% interest for 18 months means it's 0% interest for 18 months. If you take 19 months, you are paying 19 months of interest.

Good post Renato. I wonder what is the ratio of people that pays off the 0% interest during the agreed upon duration vs. people that fall off the wagon. Absolutely not a scam...Just another way to encourage people to spend above their means, after all, hey "it's only 500 a month" ... Sounds a lot like buying an 800k property when you can barely afford 200 ... Me? I'll stick to cash!

[Timber Loftis]

The financing model I've seen was 36 months 0% interest but the full price was divided by 36 and that was set as the minimum payment per month. It was set up so there was no way to take 37 months to pay it off. The goal was getting you to buy a watch, not trapping you in a "gotcha" moment to bilk you for financing fees or interest.

[Rookhawk]

Originally Posted by MoBe

Thanks for spelling it out Rookhawk.

I have not been able to independantly confirm that,in the case of a 0% credit issuer,there is a fee to the retailer when there is no default by the debtor,in other words,a transaction fee.

Can you comment?

Apparently there are still people that want to believe that a bank or credit company will lend a consumer money simply for the asking without asking for anything in return.When it comes to buying a used watch we are constantly reminded by other members of the forum,"if it sounds too good to be true then it is",yet when it comes to finance we should believe that free money is a reality,you must be joking!

Hi MoBe,

This scenario is more common in certain industries than in others. Two areas where I see this daily right now:

1. My father works for a firm that sells luxury boats and yachts. Do you know what the markup is on these things? Do you know what the depreciation is on these things? Quite ironically, boats are really nothing more than anchors. No respectable bank wants to finance something that has such rapid depreciation, high markup and high default rates. (first thing a yuppie defaults on is his 5 year old 38' Sea Ray that is now worth 15% of purchase price) So, in order to sell a luxury boat as a dealer you must have financing and you must pay a fortune for that financing to offset and BUY DOWN the rates otherwise no one will buy. If someone has AAA premium credit (800 credit score) their interest rate on a large luxury boat should still be 25% interest but of course a buy-down by the dealer has to happen to make it a palatable 8-15% or you'd never sell a boat.

2. Florida real estate. The market is in the toilet and homes in my vacation community that sold for $238k are now selling used-never-occupied for $78k. (below construction costs) There is a builder in the neighborhood building new homes just like the $78k ones for $150k. How is it that he sells them? A.) High pressure sales, B.) Dedicated sales team, C.) powerful marketing efforts, D.) He worked out a deal with the bank to finance homes for stupid people with bad credit that can't qualify for a mortgage on the $78k home. (a convoluted, back-room deal that is nothing more than a buy-down)

The small, starving mom-and-pop ADs that have sold Rolex for 50+ years and that are in Rolex's crosshairs for having their dealerships pulled are no different. They have to come up with a means to provide credit to people to move inventory. Whether they sell for 20% off in a cash sale or for full sticker but they can get everyone approved for purchase (with buy down and expenses on their end), they're going to do it. Net-Net either way for them it's the same.

[MoBe]

Originally Posted by Rookhawk

Hi MoBe,

This scenario is more common in certain industries than in others. Two areas where I see this daily right now:

1. My father works for a firm that sells luxury boats and yachts. Do you know what the markup is on these things? Do you know what the depreciation is on these things? Quite ironically, boats are really nothing more than anchors. No respectable bank wants to finance something that has such rapid depreciation, high markup and high default rates. (first thing a yuppie defaults on is his 5 year old 38' Sea Ray that is now worth 15% of purchase price) So, in order to sell a luxury boat as a dealer you must have financing and you must pay a fortune for that financing to offset and BUY DOWN the rates otherwise no one will buy. If someone has AAA premium credit (800 credit score) their interest rate on a large luxury boat should still be 25% interest but of course a buy-down by the dealer has to happen to make it a palatable 8-15% or you'd never sell a boat.

2. Florida real estate. The market is in the toilet and homes in my vacation community that sold for $238k are now selling used-never-occupied for $78k. (below construction costs) There is a builder in the neighborhood building new homes just like the $78k ones for $150k. How is it that he sells them? A.) High pressure sales, B.) Dedicated sales team, C.) powerful marketing efforts, D.) He worked out a deal with the bank to finance homes for stupid people with bad credit that can't qualify for a mortgage on the $78k home. (a convoluted, back-room deal that is nothing more than a buy-down)

The small, starving mom-and-pop ADs that have sold Rolex for 50+ years and that are in Rolex's crosshairs for having their dealerships pulled are no different. They have to come up with a means to provide credit to people to move inventory. Whether they sell for 20% off in a cash sale or for full sticker but they can get everyone approved for purchase (with buy down and expenses on their end), they're going to do it. Net-Net either way for them it's the same.

So,if I may paraphrase,what you are saying is that no matter how you dress it up it is the consumer who is paying for the finance deal.

It`s funny that you should mention boats,a friend of mine once characterised his boat as a hole in the water that he pours money into and the expression has remained with me ever since.

[HERITAGE82]

Originally Posted by superdog

Impressive post. Thanks for taking the time to put it together. Sadly, most people won't actually read it because it takes to much work.

x 2

[ChristianN]

Very good post, more people should really, REALLY read up and understand how this works for them.

Someone far smarter then me once said something along the lines of: "Interest rate is only a fee on impatience". I like the saying.

[capote]

Originally Posted by floater156

I tried reading this but zoned out after three paragraphs.... sorry!

Tell me about it sorry OP.

[ArcticMoose]

TL;DR

I saw a bunch of numbers though, and think I sort of grasped what it is about.

It's easy, retrieve cash from bank account, give cash to dealer, receive watch, be happy for a while. As far as I am concerned there is no other way.