Financial Question - Loan at 0% or a Cash Payment

[RWebb]

I'm sure this is a simple and obvious question to those who know how to set up a NPV question on a calculator (or something like that), but...

my electrical utility will subsidize me if I install a ductless heat pump

I can choose either [a] loan at 0% of $4,500, or [b] a rebate of $750

Which is better for me to do?

If it matters, the cost will be about $9,500 to $10,000 I think, and I would likely get a loan at ~~6.7% (variable rate, and likely to increase over the next few years) for the remainder of the cost.

I could cash in stock or mutual funds to pay for the whole sheebang, but am reluctant to do that when I can let those monies sit and grow (at an expected rate > 7%).

[Por_sha911]

how long is the term of the 0% and 6.7% loans?

[Cajundaddy]

NPV is the path to your answer unless you have an emotional reason to do one or the other.

[Crowbob]

What's NPV?


Nevermind. I looked it up.

Still don't know.

[Scott R]

Net Present Value.

NPV = R × 1 − (1 + i)-n − Initial Investment

-------------
i


"i" is the target rate of return per period;
R1 is the net cash inflow during the first period;
R2 is the net cash inflow during the second period;
R3 is the net cash inflow during the third period, and so on ...


Forgot the most important part, you do the project ONLY if the NPV is zero or positive.

[RWebb]

Originally Posted by Por_sha911

how long is the term of the 0% and 6.7% loans?

the 0% term is for 60 months

the 6.7% adj. rate loan has no set term; I can pay it down, or off, or not whenever I want

[sc_rufctr]

If you can pay it in cash and be done with it.

[nota]

TAXES ?

there are tax credits from the feds too I think about 30%
but is the 750 income too ?

4500 at zero is zero cost

so zero loan max plus cash 5500 - 3000 tax credit =2500 long term cash

[Crowbob]

I had almost the exact same circumstance recently. I took the 0% and took the hit up front. Doing so eliminated any urgency to pay down the note. I sleep better over the 60 months which was worth the cost, more so as the months go by.

[DanielDudley]

Borrow at zero. Loan yourself the rest at zero, and pay yourself back with interest.

You will come out ahead.

[javadog]

Neglecting taxes, changes in interest rate, etc.... you are $58 ahead if you take the 0% loan.

JR

[sc_rufctr]

Cash baby

[911SauCy]

Cash and Done.

[berettafan]

Have you done the math to see if you save utility money?

[jcunning]

Pay cash unless you specifically take the money and invest it properly. IE. Good ETF/Mutual Funds. Putting it in Roth IRA, Ded-IRA is even better, but now you have lost easy access to the cash.

If you take the loan and spend the cash on other toys, now you have just lost all opportunity to make money on yourself. And you have a "car payment" for 5 years. It doesn't matter if it is 0% or 5%, a car payment takes away monthly income and is a risk.

[dad911]

Someone can check my math, but you are going to pay about $808 to borrow 4500 for 5 years at 6.7%. So $750 up front is about a wash.... but if rates go up you're better off with the 0%

Can you refi or home equity to get a better rate?

[RWebb]

Originally Posted by javadog

Neglecting taxes, changes in interest rate, etc.... you are $58 ahead if you take the 0% loan.

JR

Thx - that's de minimus

-----------------------------

not sure what "save utility money?" means

refi or home equity loans sound like way too much trouble for something this small

I'm at 3.5% now, so a refi would actually raise my rates not to mention all the processing costs, etc. that they would fold in

[javadog]

I should point out that I did not calculate the NPV of your $58 out-of-pocket savings. Factoring that in could swing it the other way. Slightly. Maybe. Let's just say that it's not financially significant which direction you go.

Might want to look into the tax side of things, maybe there is something there.

JR

[javadog]

"Save utility money" likely means that you should also consider whether this heat pump will reduce your electrical utility bill.

The next thing would be to see if you ever get your investment back.

FWIW, I hate heat pumps.

JR

[RWebb]

yes, there are some tax advantages

there are some utility bill reductions also, but it will never pay for itself during my lifetime from heating savings

the big reasons to do this are:

1. A/C in the summer - which is becoming increasingly necessary in this valley as the climate changes; esp. last year it just never cooled off at night (making it a real hell for me)

2. pollen reduction - my allergy doc said the condensation the heat pump does will greatly decrease pollen (our worst air pollution issue here in the summer, and one that really effs me up)

why do you hate heat pumps, JD? This is ductless BTW