0% APR or Cash Back: Which Saves You More Money?

You’ve read a great offer in the newspaper: “0% APR or $2,000 cash back on” …the car you’re planning to buy. A special promotion has left you with the tough choice: big cash back or 0% APR financing. To choose between low financing and cash back requires an evaluation of your own financial situation, and a little math.

Oftentimes, a low APR won’t save you as much money as you might think, especially if the deal is only good for short-term financing, like 24 or 36 months. If you need long-term financing, things can get quite murky. Take the case of the 2012 Chrysler 200. In November 2011, Chrysler promotions brought the Chrysler 200’s base price to enticing levels through huge cash rebates, or 0%-interest financing for up to 60 months. It was up to the buyer to choose.

Let’s do a little calculation.

0% APR Financing

A 0% APR over 60 months on the top trim level Chrysler 200 Limited at typical real-world transaction pricing would mean financing a loan right around $23,250 after a down payment of $3,000. This is including taxes and licensing fees in California, where sales tax is high but vehicle licensing fees are relatively low. Calculating the monthly payment is simple. Divide the principal by the number of months, as there is no interest. Monthly Payment: $388

Cash Back

The generous $3,500 cash back, with the same $3,000 down payment, would mean financing approximately $19,750. Don’t think you’re also getting 0% interest too; it’s nearly always one or the other. Someone with very good credit could likely obtain a rate of 4.99%, even better with outstanding credit. We’ll use that 4.99%. Assuming you want to finance the loan over the same 60 months, the interest will really add up, but you will still save money. Here is a handy calculator to carry out the complex 4.99% financing calculation for you. Monthly Payment: $373

A Deeper Look

That $15 may not seem like a huge difference, but it’s $900 over the life of the loan. Your interest rate, of course, will vary wildly depending on your credit and how badly the dealer needs to move the vehicle. Sometimes the low interest will save you money, but often the cash back is your better bet, especially if your credit and the current financial climate allow you to still obtain a decent interest rate.

There is a huge hidden advantage to taking cash back over the low APR financing, though. Quite simply, it reduces the total amount of your loan. Only taking into account what your monthly payments will be over the term of the loan does not allow for the possibility that your financial situation improves. You may be able to get ahead on your payments and complete the loan early, or even pay it off all at once. At that point, whatever is left of that $3,500 rebate is quite literally cash in your pocket.

That last important fact is the primary reason to recommend the cash back option, if you calculate that the monthly payment will be anywhere near equal. Being in less debt, regardless of how much interest that debt is carrying, is always preferable when possible.

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