Comments on: 0% financing is the best incentive http://www.bankaholic.com/finance/0-financing-is-our-favorite-discount/ Blogging about personal finance, foreclosures, mortgages, interest rates, and budgeting. Sat, 13 Mar 2010 19:48:59 -0500 http://wordpress.org/?v=2.8.4 hourly 1 By: Mark http://www.bankaholic.com/finance/0-financing-is-our-favorite-discount/comment-page-1/#comment-28600 Mark Sun, 07 Feb 2010 20:26:40 +0000 http://www.bankaholic.com/finance/?p=1126#comment-28600 Great tip Mike. 0% sounds great...but that "hook" to the consumer is a bit tricky. Most of the time the vehicle is a bit higher priced to make up for it. GM has done this for years. In the end..the car dealership always wins. Great tip Mike. 0% sounds great…but that “hook” to the consumer is a bit tricky. Most of the time the vehicle is a bit higher priced to make up for it. GM has done this for years. In the end..the car dealership always wins.

]]> By: Mike M http://www.bankaholic.com/finance/0-financing-is-our-favorite-discount/comment-page-1/#comment-26973 Mike M Thu, 10 Sep 2009 16:29:56 +0000 http://www.bankaholic.com/finance/?p=1126#comment-26973 I'm all for taking advantage of these deals, but the benefits may not be as great as you're making them out to be for those people who have the option of paying cash. Clearly, it is a huge benefit to those who must finance. However, if you have the cash saved but do not have the liquidity to lock up $25,000 in a 3 year CD and make the loan payment out of your monthly income, you would need to keep that money in a liquid savings account or money market so that you could pull on it each month. Now you're looking at more like a 1.75% APY (currently). Then you have to consider tax implications. If you're in the 25% bracket and pay 5% state income taxes, you only keep 70% of the interest. So the first month you pay $520.83 out of your savings, which earns $25.32 after tax. The next month, though, you only earn $24.82 in interest. After 48 months, you have $640.33 remaining. If you're liquid enough to pay for the car out of your monthly income and can lock away the $25,000 in a 4 year CD at 3%, you end up with a gain of $2157.93 in the end. But you have to be able to afford the payments out of current income then. So all in all, the no interest can save you ~$640-$3746 depending on your circumstances (what your APR would have been if you had financed with a bank, what your liquidity is, etc).... Of course that's assuming you can negotiate the same price for the vehicle. Quite often you have to sacrifice a $1000 rebate or more to get the 0% financing. That could easily tip your best financial decision... I’m all for taking advantage of these deals, but the benefits may not be as great as you’re making them out to be for those people who have the option of paying cash. Clearly, it is a huge benefit to those who must finance.

However, if you have the cash saved but do not have the liquidity to lock up $25,000 in a 3 year CD and make the loan payment out of your monthly income, you would need to keep that money in a liquid savings account or money market so that you could pull on it each month. Now you’re looking at more like a 1.75% APY (currently).

Then you have to consider tax implications. If you’re in the 25% bracket and pay 5% state income taxes, you only keep 70% of the interest.

So the first month you pay $520.83 out of your savings, which earns $25.32 after tax. The next month, though, you only earn $24.82 in interest.

After 48 months, you have $640.33 remaining.

If you’re liquid enough to pay for the car out of your monthly income and can lock away the $25,000 in a 4 year CD at 3%, you end up with a gain of $2157.93 in the end. But you have to be able to afford the payments out of current income then.

So all in all, the no interest can save you ~$640-$3746 depending on your circumstances (what your APR would have been if you had financed with a bank, what your liquidity is, etc)….

Of course that’s assuming you can negotiate the same price for the vehicle. Quite often you have to sacrifice a $1000 rebate or more to get the 0% financing.

That could easily tip your best financial decision…

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