In article <d8tac5xd9q.ln2@[EMAIL PROTECTED]
>,
Nate Edel <archmage@[EMAIL PROTECTED]
> wrote:
>Keith F. Lynch <kfl@[EMAIL PROTECTED]
> wrote:
>> Sean O'Hara <seanohara@[EMAIL PROTECTED]
> wrote:
>> > Even wealthy people will choose to finance things they could
>> > afford to pay cash for, because as long as the money remains in
>> > their possession, they can draw interest on it.
>>
>> How can they get more interest on their savings than banks charge
>> then to borrow money?
They may be able to make more money than the loan rate by some other
means than "interest on their savings". For example, they may have a
business that could really use a cash infusion, or they may think that
the stock market will outperform the loan over the period of the loan,
while the bank might not be willing or able to make such investments.
Or they may not necessarily earn more interest than they pay, but they
may still see a benefit from it. Suppose that a man purchases
something for $100,000 financed at 7%, and has money saved that's
earning an effective rate of 4%. In essence, he's gotten a loan of
$100,000 at 3%. He may find that useful on its own (maybe he wants to
purchase something else soon without financing it), or maybe he just
wants to have a $100,000 cash cushion on hand in case of trouble.
>> How can they get more interest on their savings than banks charge
>> then to borrow money?
>
>In the case of credit cards, yes - if you don't carry a balance, and
>pay your usage off completely with each month, you're getting an
>average of a half-month's loan of whatever you spend on the card,
>completely interest free to the borrower ...
Unless, as Dorothy noted, the card has no grace period on purchases.
Fortunately, I've not run into those myself.
>Similarly, some merchants will eat the financing cost ... as a
>promotion.
Indeed. Similarly, occasionally banks offer high interest rates for a
limited time as a promotion.
I benefited from both. I sold stock last year to buy a car. I then
learned that Honda offered 2.9% (simple) financing on a three-year
loan. Furthermore, Capital One offered a promotional chequing account
paying 5% APR guaranteed for the next year. The effective gap is much
less due to paying tax on the interest earned but getting no deduction
for interest paid, and a little bit less for the difference between
APR and simple interest. Nevertheless, I still came out a little bit
ahead by putting the money into the chequing account and financing the
purchase.
Furthermore, I still have approximately the price of a new Honda Civic
in a highly liquid and safe account as insurance against a sudden
financial problem.
I assume the chequing account will reset to a MUCH lower rate soon;
if I can't find another liquid and safe investment that pays at least
(um, 2.9 .72 / p) 4.03%, I can just pay off the balance with a cheque
and have remaining about what I've paid for the car over the past
year.
--
Tim McDaniel, tmcd@[EMAIL PROTECTED]
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