When Zero per cent is not your friend

With many car dealerships offering 0% financing, it can be easy to think that you are receiving an ‘interest free’ loan when you purchase a vehicle with this incentive.

Purchasing a vehicle is a major financial decision and it pays to know a little bit about your options when it comes time to signing the paperwork. I’m going to show you the math behind choosing the 0% financing option vs. choosing the cash rebate. Hopefully you will be able to make ‘cents’ of this all when it comes time to purchase your next vehicle.

Many auto makers advertise large cash rebates off the purchase price of their vehicles. The catch is these discounts only apply to those who purchase the vehicle in cash and do not require financing. Unfortunately you are not able to receive these cash rebates in addition to the 0% financing incentive so you must make a decision, do you pay in cash or finance?

As an example, lets look at the 2014 Nissan Titan. Currently Nissan is offering a $13,000 cash rebate when you purchase the vehicle in cash, or you can choose 0% financing for up to 84 months and receive a cash rebate of $6,000.

The 0% option does seem like the better option of the two, however in some cases financing at a higher rate of interest will save you money, let me show you how.  If you financed the Titan for 48 months at 0% with the lower cash rebate, your payment would be $887.70/month with a total purchase price of $42,610 after the term.

If you financed the Titan with a 3.99% auto loan and took advantage of the higher rebate, your payment would be $838.58/month with a total purchase price of $40,252.04.

Even though you would have paid $5,538.12 in interest over the course of the loan, this would have been offset by the $7,000 difference in rebates offered by the dealership.

After reading this, my hope is that next time you purchase a new vehicle, you’ll do some math and see what option works best for you!

Take care,

Bryan Bye, CFP