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What’s Better - Cash Back or 0% Financing?
By JLP | February 19, 2007
We all see “Cash back or 0% Financing” advertisements all the time. Have you ever thought about which deal is better for you?
Let’s say you are looking at a Chevy Impala. Right now, Chevrolet is offering $3,250 cash allowances or 0% financing for 60 months on the Impala (the website doesn’t say anything about a downpayment so we’ll assume there isn’t one). We’ll say the Impala normally sells for $26,000. For this little exercise we will assume that there are two ways you can buy this car:
1. Finance $22,750 ($26,000 - $3,325 = $22,750) through a third party at 6.25% (the best rate I could find through a local credit union) for 5 years.
2. Forgo the cash incentives and take the 0% offer for 60 months.
Assuming you want to buy this Impala, which way is the best way to go?
Here’s the math I came up with:
According to these numbers, it is better to go the 0% route. This doesn’t mean it is ALWAYS better to go the 0% route. You have to do the math yourself to find out which way is best for you.
I also did a calculation in Excel to find the breakeven point in the interest rate that would make 3rd party financing the better deal. I came up with 5.38%:
That means that if you could find an interest rate lower than 5.38%, you would do better by going the 3rd party route instead of the 0% offer.
That said, this post is not advocating you go out and buy a new car. In most cases you would do better to buy a good used car.
Topics: Budgeting, Cars, Financial Math Basics |