## Cash Back or 0% Financing

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
HardHitter
Posts: 473
Joined: Wed Jan 08, 2014 11:41 pm

### Cash Back or 0% Financing

About to buy a new car and wanting to figure out if I'm working out the right numbers. The dealership is offering an incentive which is \$1,750 cash back or 0% financing for 60 months. Whether I take the cash back or 0%, I will be putting the money into a safe CD that is 1.6% for 11 months (Will repeat for term of loan). Here are the numbers I'm running and assuming I'm not doing a down payment:

- If I took cash back deal, loan amount would be \$29,423. Assuming a 2% interest rate on the cost of the loan and 1.6% return on the invested money, the cost of the loan is an additional \$308. Add that to the initial loan amount and it gives a final price of \$29,731.

- If I took 0% deal, loan amount would be \$31,348. Putting that amount into 1.6% return nets around \$1,300. Subtract that from the loan amount gives us a final price of \$30,057.

- In summary, the car would be \$325 cheaper taking the cash back offer vs 0%

Any other thoughts on this? Are the numbers right?

BarleywineAndBob
Posts: 13
Joined: Thu Jun 08, 2017 3:49 pm
Location: Desolation Row

### Re: Cash Back or 0% Financing

What is the term of the 2% loan?

Also, I wonder if factoring in the CD's 1.6% is an unnecessary complication.
Businessmen, they drink my [barley]wine.

runner3081
Posts: 1673
Joined: Mon Aug 22, 2016 3:22 pm

### Re: Cash Back or 0% Financing

HardHitter wrote:
Thu Jan 18, 2018 12:38 pm
Are the numbers right?
Don't forget taxes on your CD interest. Depending on your tax situation, could be 20+%.

If it was me, I would just pay the cash for it with the \$1,750 back and be done with it.

lakpr
Posts: 300
Joined: Fri Mar 18, 2011 9:59 am

### Re: Cash Back or 0% Financing

Another way to look at it:

Loan amount without cash back = \$31348
Cash back =\$1750

Works out to be \$1750/\$31348 = 5.58% return.

Remember that this is essentially an after tax return.

Assuming a 22% tax bracket, this is equivalent to 7.15% return.

Which investment will give you GUARANTEED return of 7.15% with no risk?

Take the cash back deal.

Watty
Posts: 14354
Joined: Wed Oct 10, 2007 3:55 pm

### Re: Cash Back or 0% Financing

There is a non-zero chance that the car will be totaled or sold before the loan is paid off which would add a bit of weight towards taking the cash back.

I think you are making the math too complicated. I didn't try to crunch the numbers but the way I would look it is;

1) It takes 60 months(or whatever) to pay off the 0% loan for \$31,348 with a monthly payment of \$X.
2) With a \$29,423 loan at 2%, if you made the same \$X a month payment, then how many months would it take to pay it off.

Whichever would have the car paid off first would be the better loan, assuming that you keep the car until it is paid off.

The bigger questions is if having a \$30K car loan is a good idea or not. If you can't pay cash for the car then buying a less expensive care would be worth considering.

Jags4186
Posts: 2540
Joined: Wed Jun 18, 2014 7:12 pm

### Re: Cash Back or 0% Financing

HardHitter wrote:
Thu Jan 18, 2018 12:38 pm
About to buy a new car and wanting to figure out if I'm working out the right numbers. The dealership is offering an incentive which is \$1,750 cash back or 0% financing for 60 months. Whether I take the cash back or 0%, I will be putting the money into a safe CD that is 1.6% for 11 months (Will repeat for term of loan). Here are the numbers I'm running and assuming I'm not doing a down payment:

- If I took cash back deal, loan amount would be \$29,423. Assuming a 2% interest rate on the cost of the loan and 1.6% return on the invested money, the cost of the loan is an additional \$308. Add that to the initial loan amount and it gives a final price of \$29,731.

- If I took 0% deal, loan amount would be \$31,348. Putting that amount into 1.6% return nets around \$1,300. Subtract that from the loan amount gives us a final price of \$30,057.

- In summary, the car would be \$325 cheaper taking the cash back offer vs 0%

Any other thoughts on this? Are the numbers right?
This isn't a 0% loan. It's a 2.5% loan because you're not getting "cash back". That's the interest rate you'd pay on a \$29,423 loan to pay \$1750 in interest over 60 months. I would pay cash and the lower price.

Anyway, your comparison isn't valid. With your Ally CD idea, you aren't taking the money out of the CD for the monthly payment, hence lowering the amount earning interest. Thats why it looks more equitable than it is.

Toons
Posts: 13016
Joined: Fri Nov 21, 2008 10:20 am
Location: Hills of Tennessee

### Re: Cash Back or 0% Financing

Watty wrote:
Fri Jan 19, 2018 6:10 am
There is a non-zero chance that the car will be totaled or sold before the loan is paid off which would add a bit of weight towards taking the cash back.

I think you are making the math too complicated. I didn't try to crunch the numbers but the way I would look it is;

1) It takes 60 months(or whatever) to pay off the 0% loan for \$31,348 with a monthly payment of \$X.
2) With a \$29,423 loan at 2%, if you made the same \$X a month payment, then how many months would it take to pay it off.

Whichever would have the car paid off first would be the better loan, assuming that you keep the car until it is paid off.

The bigger questions is if having a \$30K car loan is a good idea or not. If you can't pay cash for the car then buying a less expensive care would be worth considering.

Bingo In Bold

"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

ThePrince
Posts: 357
Joined: Sun Aug 20, 2017 9:15 pm
Location: U.S.A.

### Re: Cash Back or 0% Financing

Toons wrote:
Fri Jan 19, 2018 7:48 am
Watty wrote:
Fri Jan 19, 2018 6:10 am
There is a non-zero chance that the car will be totaled or sold before the loan is paid off which would add a bit of weight towards taking the cash back.

I think you are making the math too complicated. I didn't try to crunch the numbers but the way I would look it is;

1) It takes 60 months(or whatever) to pay off the 0% loan for \$31,348 with a monthly payment of \$X.
2) With a \$29,423 loan at 2%, if you made the same \$X a month payment, then how many months would it take to pay it off.

Whichever would have the car paid off first would be the better loan, assuming that you keep the car until it is paid off.

The bigger questions is if having a \$30K car loan is a good idea or not. If you can't pay cash for the car then buying a less expensive care would be worth considering.

Bingo In Bold

+1

HardHitter
Posts: 473
Joined: Wed Jan 08, 2014 11:41 pm

### Re: Cash Back or 0% Financing

Got it guys.

Well regardless, I'm going to take the cash on the deal and the try to finance as low as I can on interest rate. It also is likely best that I don't take the 0% because I doubt I'll have monthly payments over my head for the next X months because I just hate having payments when I know I can just pay it off all in cash. I will likely "true up" every quarter and dumb a nice chunk into the payment to pay it off in a few years and not have to pay much interest.

Any other suggestions?

Alexa9
Posts: 1636
Joined: Tue Aug 30, 2016 9:41 am

### Re: Cash Back or 0% Financing

Depends on what rate you can get with the cash back offer.
I think a bigger factor is negotiating the price of the car.
The dealer might offer you a better price if they prefer one method over the other.

HardHitter
Posts: 473
Joined: Wed Jan 08, 2014 11:41 pm

### Re: Cash Back or 0% Financing

Alexa9 wrote:
Sun Jan 21, 2018 10:19 am
Depends on what rate you can get with the cash back offer.
I think a bigger factor is negotiating the price of the car.
The dealer might offer you a better price if they prefer one method over the other.
Yep, that is what I'm doing at the moment. I have negotiated down and then from there my next step is to send a final "offer" to the dealerships in the likes of "If you can get my out the door at \$x price, I'll come in now" and see who takes it.

Once I'm in the actual dealership, I can try to haggle them a little more, introduce a trade in, see what financing they'll do, etc etc.

On my last car, I told them I wanted to be all in at \$25K and after 1-2 hours of negotiating and the rep "promising me" he could get the low interest rate if I did financing (where they make their money) the manager came back and said \$25K but at some high interest rate. Even though I was going to pay all cash that day, I said "Thank you very much, I'll take the price and drop the financing"

He was pretty pissed, but he negotiated wrong. Hoping to do something similar here unless they give me good rates.