Joe Beats the Bank

From Joe: “Enjoyed your recent comment on how having money in stocks and taking out an automobile loan is the equivalent of buying stocks on a margin. [Except that with a car loan, the interest isn’t even tax-deductible! – A.T.] As investors and the drivers of automobiles, my wife and I sold a portion of our holdings in Kelloggs and Campbell (great stock!) to buy her 1995 Cutlass Supreme (low mileage used car, of course!). The dealer would not let us pay cash for the car, so we put 50 percent down and ‘borrowed’ the remaining 50 percent. Within about 30 days, we had paid off the loan. When I called the bank to get the payoff amount, the woman thought I was selling the car. Nevertheless, we paid off the loan and earned a guaranteed 10 percent return on our investment. [Not having to pay 10% is as good as earning 10%. – A.T.] Now we have a decent car for her to drive and excess cash to continue investing in the market.

“This strategy may be scoffed at by some, because the money might have done better sitting in the market. I look at it this way. The market did well, and our unsold shares increased in value. Had the market turned south, my wife’s car would still be paid for, and with our excess cash we could replenish our holdings at lower prices. No one can predict the market, but this is what I call a win-win strategy.”

A smart way to look at it, if you ask me. But, I wrote back: “Huh? The dealer wouldn’t let you buy the car for cash?” And got this in reply:

“Our dealer was surprisingly honest with us. He said they make money three ways. On the sale of the car itself, on the extended warranty (which we didn’t buy), and on the financing (they get a “finder’s fee” from the bank). If we didn’t finance it, he would have given us less money on the trade-in (a fourth way they make money). We didn’t feel it was worth the extra effort to sell the trade-in on our own, so we opted for dealer-financing and paid the loan off in about thirty days.”

I used to advise people to act as if they planned to finance the car, without coming right out and lying about it . . . then, once the price was firm, just to whip out the checkbook and pay cash. That was my suggested negotiating ploy. I felt a little bad about it – but only a little. “The car dealers have their bag of tricks, and you have yours.”

Well, Joe went me one better, although in this case it appears to be the bank, not the dealership, with whom he may have been dealing in less than 110% good faith.

The one thing to be sure of before you play it the same way: are there any one-time loan fees or prepayment penalties? (For example, if it’s a “Rule of 78” car loan – I hope not many are anymore – then the interest is “front-loaded,” which means you get nicked on prepayment.)

Note that the Internet provides all kinds of helpful ways to buy cars cheap, with more coming all the time. I should do a column on that soon – so if any of you have had good or bad experiences with this, or tips of your own, please let me know.