It's very easy to understand the transaction of simply writing a check for something, right? But understanding the transaction for something that's financed is a lot more complicated and there's a lot more moving parts. So we're going to go through and discuss a little bit here how that finance transaction financially works and what it looks like, kind of who are the players that are involved. Me here is the dealership, we're looking at a traditional kind of 0/60 financing for example. We don't make any money on your financing transaction. It does not matter to us one iota whether you write a check or you choose the financing. There's more paperwork for us when you do the financing, but we're not generally making money on that. When you're looking at automotive financing or high interest rate stuff, sometimes there are kickbacks to the company that's selling that loan to you, right? But for us as a dealership, that generally does not happen. We do not make money on this.
Generally the equipment company is not either. They're subsidizing these loans, that 0/60, that 0/84, whatever you're seeing out there. That costs them money, right? They're going out to banks and buying those loans and buying down those low rates. That cost is usually offset a little bit in some kind of potential cash discount. So when you go through and you look at the cash discount for your piece of equipment, what you're going to want to weigh here is the value of that financing, the value of your cash in a 0/60, versus the potential cash discount that you're going to get by writing that check. More often than not, what I find is that the cash discount that's offered is usually stingy enough, it's low enough, that going and taking your money and investing it elsewhere, putting your cash to work some other place than writing a check back to the equipment company for that piece of machine, is ultimately going to put more money back in your pocket in the long run.
So when you're going through and financing this piece of equipment, we need to lay out out front here that there are some costs involved. Financing does not happen for free. There's two fees that you're generally going to see on most financing contracts. One of those is going to be a state UCC fee. That's going to vary depending on your state and what they charge. Here in Pennsylvania, we have the most expensive UCC fee in the country, thank you Pennsylvania, at $168 for all the contracts under 60 months. Once you go over 60 months, that jumps up to $252. Many other states are under $100 for that, some are under $50, some are none at all. But it's very common to see a UCC and if you're going to finance the machine, that's an expense here that we want to keep in mind.
Another expense is a potential documentation fee. Most of the lenders, in this case CNH or Kubota or whoever we're dealing with, are going to charge us a fee on the back end in order to file and process that loan application. We generally turn around and pass those expenses onto you so you're going to see a nominal documentation fee on the contract, in our case $89. Those as well are going to vary by state and vary by loan type, so that's not necessarily consistent for every one of you out there too. Generally in consumer lending documentation fees are often illegal, they're usually zero in most states, commercial loans and stuff, there's some flexibility there in order to put some fees on but in our case generally we're turning around and simply passing that fee along to you that's generally passed along to us by the equipment company.
Another requirement that you're going to have generally when you're financing this machine is insurance. Now I'm going to leave insurance out of this conversation here today because you can buy it in a number of different places. Because these loans are generally turned around and sold off to banks, they're not held by the equipment company, those banks are going to require that their assets are insured. We're big fans of Kubota's KTAC program, we use CNH's insurance program as well. Certainly go through and look at the costs and coverages for those things but I'm leaving them out of my cost equation here because I see a lot of benefit to these things. Again, not a big dealership profit center here, we don't ultimately care what you do, we're just trying to get our stinking paperwork filled out, but there's definitely value to these insurance programs, we see them pay back the customers on a regular basis. More often than not, you are more likely to break or lose a piece of equipment or have it stolen than what these machines generally are to break down in [inaudible 00:04:51] as reliable as they are so we see a lot of value to our customers in insurance.
In order to go through and calculate the amount of money that we're able to make by keeping this and investing it ourselves, I'm doing a simple amortization here. This goes through and takes the $20,000 that I'm going to go through and basically finance on this machine, takes my monthly payment and follows that reducing balance that I have. By going through and taking that balance then and looking at investing it somewhere, we're going to do a compound interest calculation on top of that in order to see how much money we're able to make on that over that duration, that five years or so we're going to finance this. So by taking my $20,000 on a 0/60 program I'm going to end up with a payment of $333 a month.
If I go the whole way down here to the end of the term of this thing, I'm going to make $1,966 in interest if I can find somewhere to put that money that's going to earn 4%. Now that's going to have some compounding effect on top of it as well. As I make money on top of my money, my compound interest, I'm adding $266 to that. So my total out money, the total amount of money that I am earning by keeping that cash and putting it to work, is $2,232 over the course of that term. Now you're going to pay taxes on that, so about 30% of that say is going to come off the top, but you're going to walk away with about $1,500 at the end of that five year term that you are able to keep in a much better to you situation than going and taking a $600 cash discount, putting you $900 to the better.
Now I picked 4% as a pretty conservative number, but the market has returned a lot more than that over the last several years. The market itself over the last 10 has averaged at 9.2%. The S&P 500 itself has been up 13.6, averaged out over the last 10 years. So if we take that same calculation that we did at 4% and kind of shoot down the middle here at 10, say we're getting a 10% return on our money, year over year, these numbers start to look a lot more compelling. Your interest earned now shoots up to $4,900. The compound interest adds another $1,600 on top of that, putting $6,500 in interest that you made on that money back in your pocket. Now if we take out $1,900 at a 30% tax rate, you've got $4,600. You gave up potentially a $600 cash discount when you could have gotten $4,600 by putting that money in the market. $4,000 ultimately to the better by financing a machine over paying cash for one.
It seems a little nuts to look at things this way, right? That you can end up that far to the better. There is a number of other places too that you can look at buying machinery and tractors as a sound financial investment, as crazy as this sounds. When you go through and you look at the market for these machines and the resale value that they hold, you can own these machines for years and really not lose a whole lot of money on them because the used market for them is so strong. Add right now all the other market conditions that are happening of shortages and inflation and rising costs of materials, the purchase that you make today is going to hold its value that much better over the long term.
I'm a guy who's not afraid of investing in durable things that retain their value and equipment is certainly one of those things, so I can find a lot of reasons why investing in a piece of machinery like this is a really sound investment, right? Besides the fact that it gets all kinds of things done for you at home, on your property, helps your businesses make money, however you're putting this equipment to work. Going through and using that, manufacture approved financing really can help you have that additional cash that's necessary to put it to work in other places as opposed to just handing it back to tractor company. So I'll put a link down here in the description to the little Excel sheet that I made in order to make this thing and go through and do these calculations. It's not hard, you plug in a bunch of numbers here and it's going to tell you how it kind of works out for you in the end.
Excel Sheet - https://www.dropbox.com/s/36zl3ymkdack9wu/CashVSInvest.xlsx?dl=0
