Comments on: What’s Better – Cash Back or 0% Financing?

By: Greg

Greg — Wed, 07 Mar 2007 15:05:36 +0000

Be agressive. See how far below “cash back” you can negociate. When you go to F&I, ask for 0%. If they say “No,” you can always walk.

By: Blaine Moore (First Time Home Owner)

Blaine Moore (First Time Home Owner) — Fri, 23 Feb 2007 14:16:19 +0000

Rob has the right of it; are you going to keep the car for 5 years? Is it still going to be worth making payments on 5 years from now? Could you wind up upside down on your payments if you had an accident?

Personally, if I had the cash to pay for it outright (optimum situation), then I would probably take the lower price, put a sizable down payment in place, and then pay twice or thrice the monthly bill. That way, I pay less for the car all-in-all, I still have some money to have invested, and I’m not stuck under a loan for as long.

Realistically, though, I don’t plan on purchasing a new car. I’d rather get a car that’s a year or two old, has around 15-20000 miles, and only costs $10-12k that I could pay cash for. I don’t currently have savings to pay cash for a “new” car, though, so my plan is to make my truck and my wife’s car (both owned outright) last for as long as possible. In my truck’s case, that should be at least 4 or 5 years, in which time I will probably be looking for something more baby friendly anyway.

By: fivecentnickel.com

fivecentnickel.com — Fri, 23 Feb 2007 11:06:20 +0000

Weekly Roundup – 02/23/07

Here’s a quick look at some of the articles that caught my eye over the past week…

Jim points out that Citi writes checks for 0% balance transfers.
FMF advises you to save money by buying the right garage door. Failing that, my best advic…

By: Rob

Rob — Wed, 21 Feb 2007 00:02:10 +0000

Another important point is that this assumes you will actually keep the car for five years. Paying the higher price for 0% financing is basically like paying points on a mortgage, the longer you intend to keep the mortgage the more sense it makes. I would guess that the break-even point for the 0% financing to be better is probably around 4 1/2 years.

By: J.D. @ Get Rich Slowly

J.D. @ Get Rich Slowly — Tue, 20 Feb 2007 21:02:32 +0000

Hm — why not run the numbers on other price points. For example, with a $20,000 vehicle you’re better off taking the cash back. At some point ($23,000?) there’s going to be a crossover point at which it makes no difference, but for lower-priced vehicles cash back makes sense.

By: Miguel

Miguel — Tue, 20 Feb 2007 19:49:34 +0000

Chris,

I would approach this as if you are buying a car valued at $22,750 (what they’re really willing to sell it to you for). You have several options:

1) Pay cash, which means giving up investment returns on $22,750. Let’s assume you can get at least 8% ROI on your invmnts – that’s a big oppty cost.

2) Borrow at an upfront cost of $3,250 (an implied rate of 2.7% as described above).

3) Borrow elsewhere at commercial rates (guessing 5-10%)

So, #3 is going look expensive relative to #2. And if you get something like 8% ROI on your funds, #1 less attractive than #2, so in theory, #2 wins.

I’m ignoring the fact that the loan probably amortizes, and should adjust all calculations for time value, etc., and also ignoring some optimal combo of the options, but that’s way more work than I’m willing to put into it.

By: Chris Hynes

Chris Hynes — Tue, 20 Feb 2007 18:16:26 +0000

If you’re getting cash back and investing, I’d assume you’d want to do an analysis based on financing the whole amount both ways. In other words, both scenarios should have you taking out a 26k loan on the vehicle. In one, it’s 0%… in the other, you invest the cash you get back.

BTW, my credit union (Navy Federal) has car loans starting at 5% in case you want to use that number in your calculations. Link: http://navyfcu.org/rates/lease-frameset.html

By: JLP

JLP — Tue, 20 Feb 2007 17:46:44 +0000

This post was actually challenging to put together. The problem with taking the cash back and investing it assumes that you have the cash in the first place. I was trying to make this illustration as simple as possible.

The very best route (if you are buying this particular car new) would be to take the cash back and pay cash for the car.

Jesse,

I’ll see what I can come up with.

By: Jesse

Jesse — Tue, 20 Feb 2007 17:42:06 +0000

I’d like to see a continuation of this post where you take the cashback and invest it, as one of the above posters mentioned. Nice post though. I’d be inclined to buy used and pay cash.

By: Miguel

Miguel — Tue, 20 Feb 2007 17:35:56 +0000

Good point tinyhands. I wouldn’t doubt that one late payment, even late by a day, would trigger some nasty rate for the remainder of the loan. My comments were only approaching this as a brain-teaser in answer to JLP’s question.

In reality, I would be inclined to pay cash for the car – I’m all about simplifying my personal finances and don’t want any consumer debt, however attractive, not to mention one more bill to keep track of.