Usually we only consider two things when financing: getting the best price and getting the best interest rate for an asset. What if instead of focusing on financing the item you are purchasing, you focus on financing a cheaper item you already own? With some careful planning and foresight you can do just that. What am I talking about?
We have purchased various assets while financing other items we already own to get a lower interest rate. Let’s take a look at some examples that we have done:
Finance a house with a student loan
When I was in graduate school, the going rate for student loans was 4%. In addition, during school the loan was subsidized, essentially 0% while I was in school. Because we knew we would likely be in the market for our first house within 2 years, I took out the student loan and earmarked the money toward a bigger down payment for our house. This resulted in savings two-fold: a lower interest rate than if we financed more on our mortgage at 6%, and the avoidance of PMI.
Finance a recreational vehicle with a standard vehicle
The rates on boats, motorcycles or other recreational use vehicles are usually higher than cars. Take a car that you already own and finance that instead. At Pentagon Federal Credit Union, cars are 5.29%, motorcycles are 6.49%, and boats, RVs and trailers are 6.15%-9.15% depending on the terms.
Finance a vehicle with a credit card
With the going rate of 5.29% for vehicles and 0% for some intro credit cards, this one has a great potential for savings. Since the credit card offers usually expire at the end of one year, you need to be willing to find another one and move the money around. This one is a little more risky because the offers could dry up sometime in the future, but one that I implement routinely. The Sun is actually considering paying off a car with a credit card right now.
Action Plan
There’s always more that one way to look at things. Being creative has saved us thousands of dollars. Many of these strategies come with all the standard warnings and disclaimers. To save more money, don’t overbuy and get a good price. Don’t use financing alone to justify buying an item that is too expensive. If you’ve determined you can afford the item, then put these strategies into play to spend even less. Â
1. I think that you can write off the interest on a recreational vehicle just like it was a second home. I suppose that you would have to take the loss of tax write off into consideration when financing.
2. Exchanging secured car loan for unsecured credit card debt sounds like a winner.
@Lost Cause: You are right. If it is an RV or boat with sleeping, cooking and bathroom facilities it is deductible. I didn’t consider that since we used it for a motorcycle, but it could change the math for the others.
Interesting, never thought about switch-hitting the financing. The only one that scares the beejeezeeeus out of me would be the credit card/car one. Not because the interest rates or anything, but because of the Universal Default clause that most credit cards have. Waking up to find out that your car loan was suddenly at 34.9% because you’d missed a couple of credit card payments would be horrible.
Financing a house with student loans…nice! I like your ideas.
@Randall: 34.9% on car loan would be bad news! You really have to commit to making sure you don’t miss a payment. It’s profitable, but only if you are careful. I’m incredibly organized when it comes to the credit cards. I have to be!