Cash Back vs 0% finance

$3,000 rebate ...

0% interest rate loan ... 7.7% annual returns ... Six to ten or more years

Rule of 7's doubles money at 7% over 10 periods, so assuming you're paying more than $3,000 for the car, do the loan. There are other factors involved, such as the seller's insurance on the car and premiums you might be required to pay. Check the fine print. The data you provide omits the amortization of principal and time, so your return can't be computed accurately (it will be on the unamortized balance, not the whole amount unless you have a one-pay lump sum at the end of the term, but using PV as you describe should give it to you).

Return = principal x (1+rate)^10 Return = prin x 1.07^10

1.07^10 = 2.099

Seller is transferring responsibility to you to get your 7%+ and you can minimize your minor payment annoyance by setting up autmatic debit. Make sure you follow recommended maintenance procedures, change the oil regularly, and optimize your use of the vehicle.

Another possibility - get the rebate, and finance the car with a local credit union to get a low interest rate. My credit union finances new cars for 2.49% for 48 or 60 months, or 2.99% for 72 months. YMMV

Thanks.

The vehicle will be approximately $40,000.

The last time I did a 0% loan (actually it was on the vehicle I'm trading in), there were no additional costs for insurance or anything else, but I will check that out.

So I figured a price if I Finance of $40K; and an upfront payment of $37K.

They will go up to 6 years on the 0% loan, so that is what I figured.

With a 7% rate in the PV calculation, I get a PV of $32,586 for the loan payments. So I am assuming, as you wrote, that the 0%/6yr loan is a significantly better deal than paying $37,000 cash.

Thanks.

I thought about that, but initially didn't know how to compare things.

After reading dapperdobs response, I think I could still do a Present Value calculation comparing:

1. Cash Price with Rebate: ,000
2. Finance Price at 6yrs / 0%: ,000
3. Cash Price but Finance at 6yrs / ??%: ,000

Figure I will earn 7% on my money.

So I think I should go with the deal that gives the lowest PV.

Using those values, I would need to get an loan rate of 2.599% in order to break even compared with the 0% loan and no rebate. So even the 2.99% that your credit union offers would not do it. (My bank quotes 3.99%-4.55% for new car loans in that price range and term).

Thanks for the idea. But I think I need different numbers for it to work out.

payments. So I am assuming, as you wrote, that the 0%/6yr loan is a significantly better deal than paying $37,000 cash.

I agree, but have a different spin. $40K /72 = $555.56/mo for seven years. So, given the choice of paying $37K cash or $40K / 7 yrs, we take the $555.56 as the payment of a 7 year $37K loan, and get i=2.6% (ta-da!)

This is the answer. Of course a reader without your confidence in getting a 7% return over this time might pass. But if you find a car loan at less than 2.6% elsewhere, take the rebate and cheaper loan.

payments. So I am assuming, as you wrote, that the 0%/6yr loan is a significantly better deal than paying $37,000 cash.

Thanks, Joe. Your method of figuring the break-even interest rate was simpler than mine, (although we did get the same result). So far, no luck at finding a loan less than 2.6%.

I'm aware of the risk in using 7%. And I have had a few rolling 6 year periods (since 1995) where my return was less, thanks to the most recent bear market, but I figure the chances of the next 6 years being less than the break-even point of 2.6% is pretty small.

-- Ron

Kewl - 7% and no risk! Can I get in on that? I have funds languishing in CDs.

payments.  So I am assuming, as you wrote, that the 0%/6yr loan is a significantly better deal than paying $37,000 cash.

Just to not get left behind on the alternate methods:

7% / 12 = about 0.057% monthly; $555.56 x 0.057% [and one of those summation for N from 72 to 0 thingies] = about $8,322. (I.e. a column of $555 x 0.057% x 72 [71, 70, 69 ... 0] added up.)

That's pretty close to everyone else's numbers; it doesn't compound the return, nor does it factor in a bell curve of varying returns over the periods, and it doesn't reverse-discount by inflation. But for those who two years ago were concerned about EOW (End of World), taking the 0% loan does shift the risk of Doomsday to the seller.

Oh, did I write no-risk? :-(

Even with CD's or treasuries, there is inflation risk.

I wish it could be with no risk. But this last bear messed that up. Since

2003, rolling six year returns have been less, since those have included the full effect of the 2008 bear, when I had a return of -47%. But except for 2004-2005, my rolling six year returns have been well above the "break-even" point of 2.6%. But I'm really just guessing about the six year return starting now.

don't forget to consider tax consequences. Interest on a loan not likely to be tax deductible; income from your investments may very well be taxable each year (or eventually).

That is a point. However, the funds would come from a Roth IRA, and would not be taxable in any event.

than mine, (although we did get the same result). So far, no luck at finding a loan less than 2.6%.

periods (since 1995) where my return was less, thanks to the most recent bear market, but I figure the chances of the next 6 years being less than the break-even point of 2.6% is pretty small.

Thanks, Ron. It's one thing to "know" something, and another to explain it clearly. I'm glad I hit the goal for you. As far as future returns go, I agree, "greater than 2.6%" is low risk with most forecasting a higher normal return to the 6-8 level. More than anything, it's fixed, not like you are borrowing from a HELOC (my post tax HELOC cost is now 1.8%) and hoping to beat that as we watch rates creep up in the next few years.

simpler than mine, (although we did get the same result). So far, no luck at finding a loan less than 2.6%.

periods (since 1995) where my return was less, thanks to the most recent bear market, but I figure the chances of the next 6 years being less than the break-even point of 2.6% is pretty small.

That you did.

Something I'm not comprehending: Your comment about HELOC "... hoping to beat that ..." implies to me that you will be better off as "rates creep up". But if you are borrowing from a HELOC, and rates go up, wouldn't you be worse off, having to pay a higher rate?

beat that ..." implies to me that you will be better off as "rates creep up". But if you are borrowing from a HELOC, and rates go up, wouldn't you be worse off, having to pay a higher rate?

Damn, my syntax can be too convoluted. You are NOT taking a variable and hoping to beat it. (that would be bad). The fact that your target is a fixed 2.6 is good. Rate rising for those thinking they can borrow short to invest long can blow up in their face as HELOC goes back to higher levels. A tangent, but adding to the validity of your strategy. Sorry.

OK, now I understand what you mean. I probably missed it as I try not to borrow, unless it is either necessary or financially beneficial (with no more than minimal risk) as in the case I've presented.

Thanks, Joe

be taxable in any event.

That puts another twist on this. Considering how hard we are trying to get to put money *into* a Roth - and leave it there for the long term - taking it out to buy a car when you're offered such a low implied interest rate (ie. Joe's calculation) seems like a bad idea.

Roth IRA money is retirement money, not , generally, car-buying money. You won't be able to replace it in the Roth fast enough to make up for that size a withdrawal, if at all.

There would be no need to replace it. There are sufficient funds and I'm already retired.