0% Financing might not be a good deal - FMVperformance.com : The site for all your Ford Mazda and Volvo needs
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post #1 of 1 (permalink) Old 08-05-2005, 03:20 PM Thread Starter
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0% Financing might not be a good deal

0% Financing May Not be a Good Deal

First Posted: August 3, 2005
By Robert Prest, Dealfinder Inc, 1897 Simard Drive, Ottawa, ON K1C 3B9 800-331-2044 or 613-837-4000, [email protected]
Page 1

Car manufacturers who offer low interest rates may also offer a cashback to encourage people to pay cash for the vehicle rather than taking the low (and costly to the manufacturer) interest rate. What most people do not realize is that with very low financing rates, the manufacturers expect that people will take the longer payback period with the least amount of downpayment and that this will impact their decision as to how big the cashback needs to be.

Now if you are a fortunate person who does not need a long payback period and/or has a larger downpayment, have I got a deal for you. By using the following formula you can determine if you should take the manufacturer’s low interest rate or take the cashback and get the loan from your bank:

((car selling price - downpayment) ÷ 2) x (bank interest rate - manufacturer’s rate) x (number years for loan) = amount of cashback required to make the bank rate a better deal

Please note that the selling price minus the downpayment is divided by two to reflect the average amount you would owe over the whole life of the loan. For example, take a car that you have bargained down to $30,000, tax in, and the manufacturer is offering 0% financing or a $3,000 cashback if you do not take the financing. Let’s also say you want to finance for 36 months, put down $10,000 and your banks loan rate is 8.5%. Then, according to the formula:

(($30,000 - $10,000) / 2) X (8.5% - 0 = 8.5%) X (3 years) = $2,550

Putting it another way, with a $3,000 cashback you would be $3,000 - 2,550 or $450 better off by not taking the 0% financing and getting a loan from your bank at 8.5%. In a real life situation, one manufacturer has been offering a $5,000 cashback on one of their models, which based on the criteria listed above, would result in a $5,000 - $2,550 = $2,450 saving for not taking the 0% financing. The table listings on the next page offer a more detailed breakdown of the example above ($30,000 car, 0% manufacturer’s financing, 3,000 cashback and a bank loan rate of 8.5%), given different loan intervals and downpayments. The * amounts represent those situations where the bank loan rate of 8.5% is a better deal.

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