When is 3.25% Lower Than 0%?

As counter-intuitive as it may seem, when you’re buying a car, sometimes 3.25% APR CAN be a better deal than the 0% financing offered by the dealer.  How you ask?  Let’s take a look at a real life example.

Last month, my son’s girlfriend bought a car at a local dealership. She was putting $2,000 down on the car and had the option to take the 0% financing or a $1,500 cash-back rebate.  Not being sure which she should do, the dealer “ran the numbers” for her and told her it would be a better deal to take the 0% financing.  Of course, what he didn’t tell her was he used a car loan rate that was on the very highest end of the financing spectrum to compare.  That seriously skewed the numbers.  

So, let’s run the real numbers.  Her car cost $16,500 and was a new 2011 model.  After the $2,000 she put down, she was financing $14,500. She wanted to finance it for 60 months to keep her payments as low as possible.

Dealer Financing for 60 months at 0%
Amount financed:  $14,500
Monthly payment: $241.67

Total paid on loan: $14,500

Credit Union Financing for 60 months at 3.25%
Amount financed:  $14,500
Less cash rebate (applied to loan):  $1,500
Final amount financed: $13,000
Monthly payment: $235.04
Total paid on loan: $14,102.40

Savings by using the Credit Union:  $397.60 over the life of the loan!

Her savings would have been even greater if she could have lowered her rate by financing for a shorter term (Destinations is offering rates as low as 2.99% APR).

Another surprise was in store for her when she tried to go back and change the financing, taking the rebate.  She thought she had 3 days in which to change her mind.  The dealer would not change the deal for her.  Turns out that in Maryland, there is no 3 day right of recission on auto purchases.

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