If you can pay cash, why did you finance?

[kenbo]

Originally Posted by barnakiel

Banks are taking no risks. You are fooling yourself when you think they would.


If you can back from a financing option and your present investments pay over the financing cost, then you should leverage AS MUCH AS ONE CAN. No brainer.


b.

B.

I respectfully disagree about banks taking no risk...Lehman Bros. & Bear Stearns come to mind. Better said would be do the bankers always comprehend the full risk they are assuming. The better they understand the assumed risk the more money they make.

[Peregrine1983]

It’s simple. Compare the return you can expect from leaving the money invested to the rate at which you can borrow.

If you can borrow at 3% and make 5% after taxes leaving it invested, borrow. Vice versa, pay cash.

[Shenandoah52]

Originally Posted by barnakiel

If you can back from a financing option and your present investments pay over the financing cost, then you should leverage AS MUCH AS ONE CAN. No brainer.

I had a business partner for 7 years back in the day that lived by that rule. He used to chide me saying, "Stretch is the name of the game." It worked really well for him. Until it didn't and he lost everything. Turns out he had a... wait for it... a Minsky Moment. I've watched that several times with close friends in my almost 70 years.

Leverage is powerful, no doubt about it. The problem is it cares not which side it is on.

[sanibel sailor]

Never owned a boat that wasn't already nearly fully depreciated. No longer a depreciating asset. With sweat equity, I've got my capital back plus a bit most of the time. Currently only carry liability insurance. A loan for a boat? Ridiculous in my opinion, although I know that's how nearly every new boat gets sold.

[S/V Illusion]

Originally Posted by kenbo

B.

I respectfully disagree about banks taking no risk...Lehman Bros. & Bear Stearns come to mind. Better said would be do the bankers always comprehend the full risk they are assuming. The better they understand the assumed risk the more money they make.

Banks have no risk. The underwriters which insure them, Bear, Lehman, etc... do and if you’ve ever seen the big, pretty hq buildings they occupy, it’s a very profitable business. And the only government entity which is monetarily effective is the FDIC, a small underwriter by comparison.

The moral of this thread is -don’t seek or take financial advice on a boating Internet forum.

[a64pilot]

Almost always people finance because in actual truth they can’t pay cash for an item, maybe they can in theory, but usually they would be broke if they did.
Most convince themselves that they are being smart by financing, that they make more money on their investments than the bank does lending to them, I guess because the bank are a bunch of fools, they must be cause clearly there is more profit in the stock market, can’t lose right?

Then most of the time people finance because in truth they can’t afford to pay cash or said another way most that pay cash don’t spring for that new boat and eat all that depreciation, and I deserve a new boat right? I worked hard for it.
People will spend much, much more if they can finance than they will if they have to write a check, even if they could write a big check, they don’t, it’s human nature, anyone is more thrifty with cash.
If it’s a luxury item, trust me, pay cash or you can’t afford it, don’t finance luxury, it can come to bite you.

Speaking of that guy who always borrows when he can, make money using other people’s money, your foolish to use yours right?
Well the place I used to work at and quit a couple of years after the original owner died and the partner came in and took over. Well when the original owner died, there was zero debt, it was a good company manufacturing maybe 50 airplanes a year with 85 employees, made a good profit. Grossed close to 100 Million a year with new airplanes, contract work and parts sales.
New guy came in and grew the company hugely, borrowed I believe tens of Millions of dollars if not more, when I quit it had about 200 employees and new lasers to cut metal and a huge 5 axis mill etc all mortgaged to the hilt, paved the ramp and parking lot, spent a huge amount of money on software and an IT team to manage it, hired many executives.

They laid almost everyone off last week A skeleton crew will complete a few airplanes that there are parts and engines for.
Company is done I’m sure. In five years or so he took a profitable 100 Million dollar a year company and ran it into the ground by being smart.

All because he was smart enough to use other people’s money, to make money.

[a64pilot]

Let me sort of restate that, if your 30 yrs old and can afford to start over cause you have many, many years of working life left, then take a chance, finance the thing.
But if your Retirement age and can’t afford to start over, maybe it’s time to be more cautious.

[Tetepare]

Originally Posted by belizesailor

Exactly, the oft used argument that money properly invested can earn x% thus covering the discrectionary interest expense is naive...especially when the chips are down and you are forced to start selling otherwise good assets at pennies on the dollar.

It certainly doesnt fit my risk profile.

Mine neither but I think I’ve been too conservative. I should have financed property and let it make money. It is risk, but in hindsight it would have paid well.

The real “winners” are those that get investment partners with no collateral or risk eg LLC. Spend others money not your own. Not my style but I’m not rich, see?

[barnakiel]

Originally Posted by S/V Illusion

Banks have no risk. The underwriters which insure them, Bear, Lehman, etc... do and if you’ve ever seen the big, pretty hq buildings they occupy, it’s a very profitable business. And the only government entity which is monetarily effective is the FDIC, a small underwriter by comparison.

The moral of this thread is -don’t seek or take financial advice on a boating Internet forum.

I believe at least one of the above had been sunk by a fraudulent dealer / dealing?


Maybe I should have said more along the lines of "lending banks do take risk beyond what is assumed an adequate risk/reward ratio".



Sure they take risks as anybody who makes business in the regular / legal way.



barnakiel

[svspirited]

There are a few reasons that are sensible and may make sense for you.

1. If you are in a high tax bracket the interest you are paying on the loan can be a tax write off that is worthwhile, in general a boat with a fixed head is considered a second home and the same tax rules apply.
2. If you are able to get a low enough interest rate your rate of return on that same money may be higher and the difference between the interest, tax benefits, and income from other investments can make it worthwhile. While you are almost never going to make a profit on a boat you can make a profit on the money that you would have otherwise laid out all at once.
3. If you are planning on buying through an LLC there are various tax rules depending on the state you incorporate and register the boat in that can be beneficial.

All of these assume that you are in a high enough tax bracket to be worthwhile. If not you are just throwing more money at a depreciating asset.

[chowdan]

I personally do not like having debt. As with with all financial questions and reasonings, it all depends on the person.

As for my wife and I, we stay debt free. That means any Bills we rack up are paid in full by months end.

We purchased our 4runner for cash, our boat for cash, and in turn we pay ourselves what the loan payment would be. Our theory is that if we are our own banks, we should pay our accounts as such. Every payment goes into a separate investment accounts.

Granted being 28, my wife being 26, having a quarter of a mill or so saved up allows us to do this.

[valhalla360]

Originally Posted by Belezar

The funny thing about that was it wasn’t a discretionary assets being purchased, it was homes. Yes, many people took cash out as well and spent it foolishly, but the crash came from loans on bad collateral, not the use of the funds.

A modest home could be argued to be non-discretionary.

Problem is they typical home purchased in the USA is far beyond what is needed...thus I would consider it a discretionary purchase or at least a large percentage is discretionary.

A few other thoughts:
- Making more money in the market than the interest rate: If you've accounted for RISK, possibly. The issue is, you have to pay the loan no matter what the market is doing, so you have to beat the interest rate and beat it by a good amount to account for RISK. How much depends on how risky the investment is.
- Sharing the RISK with the bank: If the boat goes to the bottom...you still owe every penny on the loan. Collateral doesn't mean you can hand them the keys and all is good. They sell what they can get their hands on and you owe the remainder (plus you owe any inflated costs they have in converting it to cash and you get a big black mark on your credit rating).
- I'll make it up on the interest tax deduction: Let's say your overall tax rate is 75% (way higher than any reality). Does it make sense to pay $1000 to avoid sending the govt $750?

a64pilot has the real answer...the vast majority IN REALITY can't afford to pay cash. So they come up with excuses and explanations to justify buying based on the monthly payment they think they can handle.

I've also seen several of the guys who live on leverage and call you foolish for not taking advantage of it...until it comes back to bite them.

[benvanstaveren]

Originally Posted by valhalla360

- Sharing the RISK with the bank: If the boat goes to the bottom...you still owe every penny on the loan. Collateral doesn't mean you can hand them the keys and all is good. They sell what they can get their hands on and you owe the remainder (plus you owe any inflated costs they have in converting it to cash and you get a big black mark on your credit rating)

I'm not sure how this works in the US, but most countries in Europe, you can actually insure yourself against this. If you finance your boat and it goes to the bottom, either your boat insurance pays out, and if they don't, you have a special insurance policy (kind of like life insurance, except it's for the "object" you're financing) that pays off the loan.


Of course, getting a new loan for a new boat after that may involve paying much more premiums than before.

[daletournier]

Originally Posted by kenbo

B.

I respectfully disagree about banks taking no risk...Lehman Bros. & Bear Stearns come to mind. Better said would be do the bankers always comprehend the full risk they are assuming. The better they understand the assumed risk the more money they make.

Your right of course but only in the bigger picture, which is alot more macro than a loan for a boat.

In an individual case like this the bank really is taking no risk, they dont lose ,they seize the asset. I'll never understand how when people take a loan for a toy such as a boat they assume they are risking the banks money, they are not ,the banks got it covered. When you deposit money in a bank you are an unsecured lender to the bank, when they lend you money the asset is their security.

A toy is only bought with excess cash IMHO, and yes the theory that you can use your money to get a better return isnt as foolproof as it once was.

[daletournier]

Minsky moment as been mentioned twice, thought I'd through in a link

https://en.m.wikipedia.org/wiki/Minsky_moment

Minsky gets mentioned more and more in recent times.