Introduction
In prepping for my Tesla 3, I was looking for the best auto loan rates. Sure, I could pay outright cash for it like one of my readers suggested, but that’s a terrible idea imo. If someone is willing to lend me money at 2% and I can make say a conservative 5% in the market (yes, I understand there are risks there,) then you take that deal! If you want to avoid the market, maybe you take that extra capital and invest in iPod shuffles or something. If I didn’t have the capital [because it was all tied up in a car,] I would have missed out on the shuffles deal. Anyway, let’s move on. I had posted a poll on Twitter and this is what I got back:
I think that 36% of people are the “I hate paying interest” type of people, which I can understand. However, one of the best responses came from Micah who wrote this, “The difference b/w 36x vs 72x is $667 dollars and 1.25% per month. Question is: with $667 cash in hand this month, can you generate $8 of profit to cover difference in interest rate? Anyone hustling can beat $8 profit on a $667 investment. Consider it $700 monthly loan at 1.25%.” I for one would rather have the cash in hand, so would go with the 72 month option. You know how much I love cash in hand? That I forgo a 4.59% savings interest rate on $20K because I’d rather have the cash. Heck, I can take $20K from the car loan at 1.74% and profit 2.85% with Consumers!
Now to find the best rate
A few people suggested I check out NFCU and Penfed, but the best rate I found that was publicly available (I know a CU in SF has a ~2% rate, but eligibility is an issue for me) was from Consumers CU (rates in the Twitter snapshot.) I even went so far as to apply and get pre-approved for the 50K loan from Consumers. Later that day, a reader sent me this from Dow Chemical CU:
At first glance, the rates didn’t look that extraordinary – they were about the same as Consumers. However, he linked me to the “Rebate eligible” page.
The reader told me that they have been giving out 70% back the past 3 years,but when I called, they said they gave back 70% last year and 75% the 2 prior years. I asked what happened and she said, “A lot of new members so we had to spread the love.” Now this doesn’t mean they’ll continue giving back 70% in the future, but if they only dropped the rate by 5% year over year, then it’s a good likelihood that they’ll give out 50-70% for the next 3-5 years. That means that a 72 month loan at 3.74% after rebate would be effectively a 1.20% rate (assuming they pay out 70% for the next 6 years.) Even if they dip down to 25%, you’re still better offer with them over Consumers (3.0% vs 3.24%.)
Likelihood that they keep giving back 70%
The question now is – how likely are they going to keep giving back 70%? Well it seems their Board of Directors vote on this every year based on the CU’s profitability. I think it’s fair to say that the more business they drum up, the more profitable they are and the increased likelihood that they’ll keep the payout at 70%. Then there’s also the fact the Republicans want to roll back parts of Dodd-Frank (Senate has passed the bill) which would loosen small regional banks’ regulations (I’m not sure if this bank would qualify for the loosening of regulations.) Therefore, I think we’re at a >50% chance that they’ll keep giving back at least 50% for the life of the loan.
Conclusion
If you’re risk averse, then this deal may not be for you. If you are willing to take the risk of the ~1% interest rate, then go for it. Worst case, if they stop paying out the dividends, you can just refinance with another bank.
Anyway, I bought shares of DOW Dupont Tuesday morning and was approved for membership later that afternoon, after uploading proof of stock ownership. I got a call from the loan department on Wednesday and they pulled my credit score of 734 (damn those 3 cards that closed with high balances,) but since the threshold was 730, I was qualified for the “best rates.” She also pre-approved me for a $54K loan, which is what the car will probably cost after the $3500 I’ve paid and the state sales tax I’ll have to pay. The payment differences are – 60 months is $988, 72 at $844 and 84 at $744. I’m leaning toward doing the 60 month just because the incremental monthly payment after that is pretty small, and the fact who knows what the rebate program would be like in 8 years. If I knew 100% it’d be 70% in 8 years, I’d do 8 years for sure, but the uncertainty of the rebate program makes me want to hedge on a shorter term loan.
I’m in the process of getting a loan, and I’ve been studying this post trying to figure it out. You say “Question is: with $667 cash in hand this month, can you generate $8 of profit to cover difference in interest rate?”. Where does the $8 come from? I assume multiplying 667 (difference in monthly payment) by .0125 (difference in interest rate). Are you saying this would cover the difference in interest you pay over the life of both loans? The way I calculated it using an interest calculator, you would pay total interest of $1,352 on 36mo loan, and $4,681 on the 72mo loan. That’s a difference of $3,329 in interest. You’re going to need a lot more than $8 in interest each month to cover that. Correct me if I’m wrong! I’m trying to understand this and make the right play.
But either way this is an awesome play to get low interest rates. If it plays out with 70% discount for a few more years, the math above won’t matter too much. Sorry to revive this old post for such pedantic detail lol
I was trying to calculate the math for the past couple of minutes and gave up. I think the $8 difference is assuming they both have the same loan length but just diff rates (2.99% vs 1.74%.) You’ll always pay more interest if you go with the longer rate, but if it’s a lower rate (say 1%) that you can get in the stock market (say 5%,) then it doesn’t matter how long the loan is. You take that all day every day.
Got the overall point and gonna stop worrying about the math. Thanks!
As a note, someone should have mentioned DCU as a great place for car loans. 65 month loans for 2.24 percent. If you’re buying an especially fuel efficient vehicle you’ll get down to 1.99. I’m paying that but my loan is a couple years old now.
To get that rate you need to have relationship checking with them, but that’s easy. They also give you 5% on the first 1k in savings so that is also pretty darn good.
Anyone can join, I might have had to donate $5 or something to a charity but I’ve never seen a DCU in person and likely never will so anyone can get in here.
Looks like 2.74% these days on their web site; couldn’t find anything about an EV deduction either.
Do they do a hard pull to join?
I don’t know; I did both the membership and loan at same time. Makes no sense to join w/o doing a loan though.
what kind of vehicle insurance requirements do they have? For example, one of my local CUs says this: “Credit Union must be shown as lien holder and loss payee on full coverage insurance declaration policy, with a maximum deductible amount of $500”
We didn’t really talk about that. She asked if I wanted GAP insurance and I said NO. She asked me for my insurance company and that I’d need to make sure I had comprehensive insurance.
You forgot the ultimate hack. Don’t buy a Tesla.
This seems insane if it applies to mortgages, right? The 5.5% 30 year rebate eligible rate is 1.125% more than the non-rebate eligible, but even if the rebate goes down to 50% it is still a fantastic rebate of 2.75% which is also the mortgage rate…?!
I wonder how the mortgage interest tax deduction works if you get a rebate? 🤔
I’m no tax expert, but I don’t think rebates are taxed, so you MIGHT NOT need to declare it, but I’ll let others who have have the mortgage chime in. The form 1098 will tell you.
Good point about the mortgage interest deduction, although that won’t matter for most people with the recent tax changes. I would assume you would take the deduction for your interest paid as usual and would not have to report the rebates……essentially treating it like credit card rewards.
Seems like mortgages only good for homes in Michigan.
Ah, well, that kills that. 🙁
Very helpful. Now I must assess my situation, and do something about it.
Awesome! Nice write up
As a Dow Employee myself, I never realized you only needed to own shares in the company to be a member. I have many coworkers who get hefty rebate check severy year from having mortgages, car loans, etc through them. I’m always tempted to refinance my mortgage , but my current rate is low enough that I’m hesitant to make the bet that the 70% rebate will continue.
You’re the 2nd person who told me about not knowing about stock ownership. I wonder if they made this change recently and hence the “lots of new members last year.”
Vinh, mind me asking: how did you purchase the stock? (newbie sorry)
Thanks in advance.
Here’s the requirements from their website: “Individuals who own one or more shares of Dow Chemical stock in their own name are eligible for membership. This does not include Dow stock held within a trust, retirement, 401(k) or other investment plan by another institution or group.”
So sounds like you just need to buy a share (a share of DowDupont not Dow since the two companies merged last year) through your taxable brokerage account.
Right, I bought shares from my Fidelity brokerage account.
When you are on the site and looking at rates, click down below in the text for the astrick by the loan rates. Click on account relationship. In there go into the details on their relationship checking benefits. The 2.74 is for anyone, if you have relationship checking they take 1/2% off the rate. Lastly look at the “energy efficient auto loan” which takes off another .25%. That applies to anything getting more than an average 35mpg.
I pulled all that off of there today, all shows accurate for today. Some of the best rates going, especially as those amount count even for older vehicles and they will loan up to 120% of the book value. I compared, but could not beat them then. Did not know about the one you mentioned in this article though!