# Is .9% financing really that great?



## pilotman (Feb 2, 2006)

I am considering taking advantage of this....

And everyone is awfully excited about the unprecedented .9% financing being offered by BMW....

But is it really that great?

We all know that the reason BMW is doing this is because it is good for THEM, they know the residuals on their vehicles are dropping significantly (hence their almost half a billion dollar writeoff loss on artificially inflated residual leases).

So basically BMW is shifting the risk of crappy residuals on to you, the buyer, by being "generous" and offering .9% financing.

So, you are just delaying a loss by taking almost "free" money now, but its not entirely "free" as BMW would lead you to believe, because you will get "hit" with a couple thousand dollar "penalty" on the residual at the end....

Plus, the residuals are likely to drop a little further just due to the financing, that is almost always one of the side effects with such "free" money....

BMW obviously has some very saavy finance people analyzing this issue, and they believe they will make more money off us by offering .9% financing and shifting the risk of a crappy residual onto the customer...

Has anyone done the math on this issue, comparing the .9% financing rate while taking into account the lowered residual value? For example, say the vehicle will now be worth three thousand dollars less after the loan is paid off....so $3,000 divided by a 5 year loan is $600 per year, divided by 12 months is $50 per month....should you be "adding" this $50 per month to your "cheap" monthly finance payment, because that is the hit you will be taking in the future?

Any thoughts?

(I want to stress that I'm not knocking BMW, I truly do appreciate the gesture, and BMW has been good to me which is why I am a loyal customer, just trying to evaluate the real economics of .9% financing versus leasing).


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## phantombmw (Nov 6, 2007)

Your post doesn't even make sense. It actually COSTS BMW money to give you .9%. Do you think they are able to borrow funds at .9%? Their cost of money is higher than that by quite a few points, the whole point of it is to increase sales as they are down due to the tough economic times. Judging by your logic, a higher interest rate is better? I'm sure the dealer wouldn't mind charging you a higher regional rate if that's more to your liking.


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## philippek (Jul 31, 2003)

There is a cost to everything, and your post brings up some good points. What you lose with traditional financing is the possibility of giving the car up, with little hassle, back to the dealership. What you gain is ownership--with all the good and bad.


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## pilotman (Feb 2, 2006)

phantombmw said:


> Your post doesn't even make sense. It actually COSTS BMW money to give you .9%. Do you think they are able to borrow funds at .9%? Their cost of money is higher than that by quite a few points, the whole point of it is to increase sales as they are down due to the tough economic times. Judging by your logic, a higher interest rate is better? I'm sure the dealer wouldn't mind charging you a higher regional rate if that's more to your liking.


you're missing my point entirely. BMW believes that it will make MORE money off its customers by steering them into .9% financing and keeping them away from leasing. BMW isn't profiting off the finance aspect in this case, but rather by profit in the vehicles.

BMW shifts the risk of a lousy residual to the customer.

Do you really think BMW is losing money by offering .9% financing? :dunno: They are in business for one reason, to make money. Don't kid yourself, they are NOT losing money on every car they sell at .9% financing, otherwise they wouldn't be doing it.


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## bmwKbiker (Nov 5, 2006)

All you points are really more along the line of the lease verses buy discussion. 

Regardless of the available finance rate, leasing fixes the residual (for the customer) and places that risk on BMWFS.
The fact that residuals (for leases) are falling simply reflects the resale market, or more precisely BMWFS's foward projection about resale values.
It may be true that aggressive lease pricing by BMW in the past has come back an bite them in the form of lower current used car values below their original predictions (residual %). You are implying that 0.9 financing may do the same in to future resale values, this is possible.

But as a buyer I'll take the financing subsidy, as already stated BMWFS's cost of funds is way above 0.9%, in lieu of a cash purchase the funds can be put in a CD or Treseasury notes returning >4%. I doubt the current financing will depress future resale values significantly, other factors may. Buying OR leasing requires the customer to pay for the depreciation, leasing simply fixes the depreciation cost, that the customer is responsible for, up front.

The general consensus on this board that in the past BMWFS's inflated the residual values to make leases cheaper in the interest of moving cars. 
But this is also a subsidy that costs them in the long term if dealers won't pay the residual on lease returns then BMWFS's incures a loss.


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## JStyres (Jul 31, 2008)

The only impact I see with 0.9%, especially with a purchase (as opposed to a lease), is the savings on the time value of money. It all comes down to less interest paid over time to incentivize the purchaser to make a purchase now that will cost them less over time.

Try getting that good of a financing rate from a private lender, even with excellent credit (would probably be around 5% for 60 mos.).

While there is some basis as to the exchange rate with the Euro vs. the dollar creeping into this, I fail to see how a purchaser is getting the raw end of the deal. Assumedly BMW can make up some of the reduced rate by increasing prices with 09s, that said, I fail to see how it affects a good deal purchasing on an 08.

BMW is going to seek to profit off the vehicles regardless of what the int. rate is. If dropping the rate accelates the sale of cars based upon a lower cost of credit, BMW should still make a profit with 0% APR. It's when the vehicles don't sell is when it hurts them.


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## pilotman (Feb 2, 2006)

thanks for the input, I agree it is still a good deal, I was just wondering how badly I'm going to get hit when I go to sell the car on the used market....

the general consenus seems to be to stick with a 3 series (or maybe a 5) because they are fuel efficient....that seems to be the key.


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## suer (Jul 1, 2008)

pilotman said:


> thanks for the input, I agree it is still a good deal, I was just wondering how badly I'm going to get hit when I go to sell the car on the used market....
> 
> the general consenus seems to be to stick with a 3 series (or maybe a 5) because they are fuel efficient....that seems to be the key.


Whatever the hit, it will be less than the hit you'd take at 3.9%.


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## BayAreaBMWFan (Aug 8, 2004)

The only question you need to ask is whether you are willing to take the residual risk for the lower finance rate. Also keep in mind that your cash outlay is going to be higher since you are paying of 100% and not just the lease depreciation.


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## tturedraider (Nov 11, 2005)

pilotman said:


> thanks for the input, I agree it is still a good deal, I was just wondering how badly I'm going to get hit when I go to sell the car on the used market....
> 
> the general consenus seems to be to stick with a 3 series (or maybe a 5) because they are fuel efficient....that seems to be the key.


You can't really make a truly valid comparison to the low rate finance offer v. leasing. It's not an apples to apples comparison.

You are correct; buying puts the resale risk on you. But, that's always true of buying. And buying (by financing especially) almost never works to the advantage of someone who will trade cars every two or three years.

So, for people who would have leased before, because they want a new car every two or three years, leasing still has the advantage of putting the resale/residual risk on BMW.

On a side note, you mention it being more profitable for BMW to put this resale risk on the consumer. True enough, but they also risk selling fewer cars to those who are getting 0.9% financing for 60 months as those buyers are more likely to keep their cars with the low finance rate for a longer period of time than they would if they leased.

On another side note, there is a thread going here right now by a guy who was considering the possible advantage of taking the low finance rate as opposed to leasing. Because of his circumstances he will only keep the car for two years no matter what. An analysis of leasing and buying (at the 0.9% rate with a 60 month loan to keep the payments similar) over the two year period revealed the potential downside of the resale value out weighed the upside of low rate financing and leasing still came out as the preferred finance method.


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## BMWFanboy (Apr 27, 2008)

Despite all these buy vs lease threads that have been popping up recently, I still haven't seen anyone explain accurately how to setup this calculation. As I mentioned in another thread, I ended up buying, but for quite some time I tried to figure out how to setup a spreadsheet to perform the buy vs lease analysis taking into account the time value of money, length of ownership, etc but I ended up giving up. It'd be great if some finance person could help with setting this up as it could also be helpful to a lot of people in the future. The best calculator I found was here but it still doesn't have all the parameters you need to factor in.


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## tturedraider (Nov 11, 2005)

BMWFanboy said:


> Despite all these buy vs lease threads that have been popping up recently, I still haven't seen anyone explain accurately how to setup this calculation. As I mentioned in another thread, I ended up buying, but for quite some time I tried to figure out how to setup a spreadsheet to perform the buy vs lease analysis taking into account the time value of money, length of ownership, etc but I ended up giving up. It'd be great if some finance person could help with setting this up as it could also be helpful to a lot of people in the future. The best calculator I found was here but it still doesn't have all the parameters you need to factor in.


I know one of the main questions you mentioned was the time value of money. In reality the amount of money difference along with the differences in potential investment returns that would be involved in a comparable lease v. buy scenario is too small to be of any real consequence.

The most consequential determining factor is the time one intends to keep the car. If one is the type of person who wants to drive a car only two or three years and get a new one and/or only wants to drive a car that is in warranty then that's the "best" case for leasing (excepting businesses that can deduct the cost of a lease). But, generally speaking, even if a person prefers to trade frequently, if one can be a cash buyer (whether or not they actually choose that route, based on the other returns available to them for their cash) it will still almost always work out to their financial advantage to buy and then trade. Of course, this is why you'd like to have a "calculator". But, because the resale price is relatively unknowable for the individual consumer I think it would be difficult to create a spreadsheet that would be broadly applicable to every situation.


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## Digitally (Feb 13, 2008)

BMWFanboy said:


> The best calculator I found was here but it still doesn't have all the parameters you need to factor in.


I know that this calculator is for rent vs buy (of house), but I just went through it and seems that it can still apply to cars just by zeroing out certain things, unfortunately it only goes up (or down) to -10% asset appreciation / year. Also there is a 'methodology' link which explains their calculation..


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## BMWFanboy (Apr 27, 2008)

tturedraider said:


> I know one of the main questions you mentioned was the time value of money. In reality the amount of money difference along with the differences in potential investment returns that would be involved in a comparable lease v. buy scenario is too small to be of any real consequence.
> 
> The most consequential determining factor is the time one intends to keep the car. If one is the type of person who wants to drive a car only two or three years and get a new one and/or only wants to drive a car that is in warranty then that's the "best" case for leasing (excepting businesses that can deduct the cost of a lease). But, generally speaking, even if a person prefers to trade frequently, if one can be a cash buyer (whether or not they actually choose that route, based on the other returns available to them for their cash) it will still almost always work out to their financial advantage to buy and then trade. Of course, this is why you'd like to have a "calculator". *But, because the resale price is relatively unknowable for the individual consumer I think it would be difficult to create a spreadsheet that would be broadly applicable to every situation.*


Well, that is why I want everything to be a variable that I can change like the expected resale price of the car, etc. It also would be helpful so if you do buy you could figure out the right down payment. Are you in finance? If so, it'd be great if you could help me create this spreadsheet.


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## mclaren (Jan 5, 2005)

The way big corporations work is they react when something bad happens. So when they lost their ass on lease turn ins they had a prayer meeting and decided to try and get folks to buy instead of lease. I, for one, think they are wrong and short sighted. IMO it's likely the value of 2 or 3 year old luxury cars will revert to the norm and recent prices are an aberration. High gas prices, a weak economy, and low interest rates have all contributed to the problem. High gas prices remove money from the budget, a weak economy reduces the number of potential buyers, and low interest rates have meant that a lot of people leased luxury cars that normally wouldn't and so a lot of supply is coming off lease. So there is a lot of supply with reduced demand and prices got killed. No one knows the future but it is highly probable some or all these factors will change in the next 2 or 3 years which would result in higher demand and lower supply meaning your purchased luxury car at .9% financing would be worth more than BMW's current residuals. So to sum up I think BMW and others panicked. It is like owning a quality stock in a bad market and selling at the bottom because everything looks bleak at that moment in time.


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## Boile (Jul 5, 2005)

pilotman said:


> Has anyone done the math on this issue, comparing the .9% financing rate while taking into account the lowered residual value? For example, say the vehicle will now be worth three thousand dollars less after the loan is paid off....so $3,000 divided by a 5 year loan is $600 per year, divided by 12 months is $50 per month....should you be "adding" this $50 per month to your "cheap" monthly finance payment, because that is the hit you will be taking in the future?
> 
> Any thoughts?


Why would the residual drop because of the low financing rate?
If I'm in the market for a used BMW, I should expect to pay $3K more for one that was financed at 5% compared to an identical one that was financed at 0.9%?


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## mclaren (Jan 5, 2005)

Boile, theoretically a low or zero finance rate could increase the supply of used BMWs down the road and assuming constant demand prices would be lower.


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## tturedraider (Nov 11, 2005)

Boile said:


> Why would the residual drop because of the low financing rate?
> If I'm in the market for a used BMW, I should expect to pay $3K more for one that was financed at 5% compared to an identical one that was financed at 0.9%?


He's referring to the fact that residuals have, in fact, already dropped, making leasing somewhat less attractive, and comparing it to purchasing at the low interest rate.


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## Boile (Jul 5, 2005)

mclaren said:


> Boile, theoretically a low or zero finance rate could increase the supply of used BMWs down the road and assuming constant demand prices would be lower.


Based on his post #1, he's making the point that BMW is trying to shift customers from leasing into financing.
If so, then the total sales volume doesn't change. Just a shift. So the residuals wouldn't be affected.

I do agree that BMW seems to be not shifting, but increasing (or actually, trying to stop the erosion of) sales with incentives.
They're already losing money on lease (the mentioned write offs), so the incentives have to be on the financing side.

Just take advantage of the low rates, if you had intention to finance anyways.


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## tturedraider (Nov 11, 2005)

Boile said:


> Based on his post #1, he's making the point that BMW is trying to shift customers from leasing into financing.
> If so, then the total sales volume doesn't change. Just a shift. So the residuals wouldn't be affected.
> 
> *I do agree that BMW seems to be not shifting, but increasing (or actually, trying to stop the erosion of) sales with incentives.*
> ...


Adrian disagrees - http://www.bimmerfest.com/forums/showpost.php?p=3491445&postcount=4
"I see BMW getting out of the incentive based push method of selling cars and going to a more order based pull method of selling cars."


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## peakpro (Oct 30, 2004)

tturedraider said:


> Adrian disagrees - http://www.bimmerfest.com/forums/showpost.php?p=3491445&postcount=4
> "I see BMW getting out of the incentive based push method of selling cars and going to a more order based pull method of selling cars."


that just not adrian thoughts ...BMW as a company announced their plan to switch to a pull method of selling...


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## [email protected] (Jun 18, 2007)

We ran a sample comparison of a $52,000 car at 5.9% and at 0.9% - The interest savings alone save a customer $7000+. 

Just because the customer saved money on his financing doesn't mean his car will be worth less money at the other end.


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## JRob37 (Jun 8, 2008)

Is a new car an investment? I've always seen it as a depreciating item, something that you use up.

If someone is truly concerned about the residual value, then a lease may be the best course. 

0.9% is surely about moving inventory as well as incenting those on the fence between leasing and buying to buy. It***8217;s also about making room for the 2009***8217;s which they***8217;ll start producing next month. At the end of the day BMW is a for profit business.


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