Which is the better deal (financing related)?

[disneysteve]

My daughter is getting braces. The total cost of treatment is $3,712. I can put down $250 and pay $150/month. There is no interest on the payment plan. The other option is to pay in full up front for a 5% discount. As I ran the numbers, it seems that by keeping my money in an account earning 5%, I'd come out a bit ahead by paying over time. And if interest rates continue to creep up, I'd do even better.

Can someone else run those numbers and let me know what you come up with? Thanks.

[safari]

Financing sounds like a better idea. Basically, you're getting financing for 2 years at 5%, which is roughly 2.5% a year. By putting that money in a 5% saving account you'll come out ahead. In addition you'll have money for unexpected expenses, in case something comes up. If someone offered me a loan at 2.5%, I'd take it in a second and then invest that money.

[disneysteve]

Originally Posted by safari

Basically, you're getting financing for 2 years at 5%, which is roughly 2.5% a year. By putting that money in a 5% saving account you'll come out ahead. In addition you'll have money for unexpected expenses, in case something comes up.

That's what I thought. Thanks for confirming. The "unexpected expense" part isn't really an issue for us fortunately, but earning at a higher rate than I'm paying certainly makes sense.

[sweeps]

I did a quick calculation in Excel. If I've done it correctly, it's a no-brainer -- you should pay up front and accept the 5% rebate. Your discount will be about $186. If you pay over time, you'll only earn about $174 in interest. And that's before the effect of taxes and inflation.

Plus use your credit card and get an extra 1% rebate.

[b4freedom]

Actually, you'll come out slightly behind.

Paying now will save you $185.60 ($3712 x 5%). You'll pay $3526.40 ($3712 - 185.60).

Option two, pay over time. You start off with $3712, you put down $250, and you're left with $3462. You go to the bank, open an account at 5%, deposit it. One month later, your account earned $14.43 in interest. You add $14.43 to your $3462 to get a balance of $3476.43. Then you pay $150 leaving your balance at $3326.43. But, your balance decreases because you are paying out more then you're earning in interest. The amount of interest you earn over time decreases. So, the real question is, after you've paid off the balance, what will be left in the bank? The answer is $185.42. (250 initial payment, 23 payments of 150, and a final payment of 12).

$185.42 is less then $185.60. Pay it off now.

Of course, this doesn't take into account inflation and taxes. Inflation and taxes seems to just complicate things.

[safari]

Originally Posted by Sweepsplayer

I did a quick calculation in Excel. If I've done it correctly, it's a no-brainer -- you should pay up front and accept the 5% rebate. Your discount will be about $186. If you pay over time, you'll only earn about $174 in interest. And that's before the effect of taxes and inflation.

I am curious how you came up with that number. $3,712 - $250 = $3,462 * 5% = $173 (the first year alone), so even if the interest rate stays at 5%, he will have earned double that amount in 2 years.

[greedy4chips]

My solution is to pay for the braces with a 0% credit card and pay it off as you choose, as long as you can keep the 0% rate or transfer it to another 0% card.

This is because of the income tax medical expense deduction. If all medical expenses are more than 7.5% of your adjusted gross income you may deduct your medical expenses above the 7.5%. You MUST itemize to get the deduction.

If your adjusted gross income is less than $50k you have a deduction based on your braces expense alone. Factor in all other expenses you have and it may be well worth the deduction.

Ex. 50k AGI, 5k medical expenses 5000 - (50000 * .075) = $1250 is your deduction. Figure 15% of that is yours or $187.50.

Add in the interest you can earn on your savings and you have a nice 2 night stay at a waterpark for free!

More info on the tax deduction can be found here...http://www.bankrate.com/brm/itax/tip...a.asp?caret=14

[sweeps]

I guarantee the cost of the braces is not more than 7.5% of disneysteve's AGI. He's a doctor.

[disneysteve]

Originally Posted by b4freedom

$185.42 is less then $185.60. Pay it off now.

Considering how little the difference is between the options, I think I'd rather pay it over time even if it ends up costing me a few more dollars just for cash flow purposes. Plus, are we running the numbers at 5%. As we all know, 5.15% is already the top rate on money markets. And rather than leaving the whole $3500 in a MMA, I could put half in a 1-year CD now at 5.68% to kick up the interest slightly.

Thanks for the input.

[Great to be Debt Free]

Maybe it's just a "me" thing, but any payment I don't have to make (regular bill), the happier I am. This really hit me hard this past wek when my friend who was in an accident has just had to replace her car and is now stuck with a car payment she wasn't expecting. It's just a bummer. So, if it were me, I'd pay the whole darn thing.

Now, one other thing to take into consideration and my actually discount my opinion above, but, if you were to run into problems with the orthodontist and it is already fullly paid, you may not have as much leveraging room as you would if he/she has not already been paid in full. Hopefully, this would neverbe a problem, but my sis and I both had problems with our orthodontist when we had braces as kids. ..

Chances are, your ortho is fabulous and again, I'd just pay the darn bill in full and not have to worry about it.

[greedy4chips]

Originally Posted by Sweepsplayer

I guarantee the cost of the braces is not more than 7.5% of disneysteve's AGI. He's a doctor.

I did not know that.

But is my advice worthwhile for someone else making $50k or less?

Why is a doctor worrying about paying off a bill vs saving it and hoping to come out $100-200 ahead?

[vsjhoc]

Originally Posted by greedy4chips

Why is a doctor worrying about paying off a bill vs saving it and hoping to come out $100-200 ahead?

Same reason we all are. It's not how much you earn, it's how much you save.

[sweeps]

Originally Posted by greedy4chips

But is my advice worthwhile for someone else making $50k or less?

It's great to put it out there, but I think most people are disappointed when tax time rolls around. As you pointed out, you can only deduct medical bills that exceed 7.5%. So for someone making 50K/year and had $5,000 in medical bills, they can only deduct $1,250. And as you mentioned, they can only deduct that if they itemize. Finally, for someone making $50K/year or less, their effective tax rate will not be that high anyway, so the actual value of the deduction will not be very much.

[Ima saver]

I personally would pay it over time, since no interest is charged.

[greedy4chips]

Originally Posted by Ima saver

I personally would pay it over time, since no interest is charged.

But there is interest charged essentially. He gets a 5% discount to pay upfront. So that is a guaranteed 5% savings plan. He also does not have to pay the taxes on any interest earned. If he is a doctor, that tax hit will be sizeable too (28%+ perhaps).


Sweepsplayer,

Your right they won't be getting much of a deduction. But it is worthwhile for some to group medical expenses into one year.

[sweeps]

Ima, let's say the discount to pay up front was 50%. Would you still pay over time since no interest is charged?

[disneysteve]

Originally Posted by greedy4chips

Why is a doctor worrying about paying off a bill vs saving it and hoping to come out $100-200 ahead?

Because we are thrifty people. It doesn't matter how much you earn. It only matters how much you spend and save. Doctors are just like everyone else: credit card debt, marital problems over money, bankruptcy, etc. We choose to follow a different route and live well below our means and remain pretty frugal. If I can save a couple hundred dollars, I'm going to do it.

[disneysteve]

Originally Posted by Great to be Debt Free

Now, one other thing to take into consideration and my actually discount my opinion above, but, if you were to run into problems with the orthodontist and it is already fullly paid, you may not have as much leveraging room as you would if he/she has not already been paid in full.

I thought about this and also just the general idea that I'm paying someone now for something they won't actually do for 18-24 months. That just bothers me somehow. If my auto mechanic asked me to pay him now for the next 2 years of service my car will need, I'd think he was nuts.

I hate debt as much as the rest of you, but even with the 5% discount, I think it is the orthodontist who is getting the better end of the deal.

[Hypersion]

This is a trick called "front loading" the interest.

Look at it this way

The normal cost of this treatment is $3526.40

Or you take out a zero % interest 23-month loan from the dentist for a 5% fee.