Better Than 0% Financing

As the economy opens back up many car manufacturers are bringing people in with the promise of 0% financing. This can be a great deal. The difference between a 0% APR and 3.5% APR on a $25,000 loan is $38 a month. However, as crazy as it seems, you may be able to get a better deal than 0%. How is that possible you may ask? That answer lies in an option for cash back instead of the lower rate, and the low rates Wauna Credit Union can offer right now. As of May 29th, we are as low as 3.09% on a 66 month vehicle loan.

Frequently, dealerships offer a catalog of incentives, most notably financing specials and cash back. People occasionally are able to select both cash back and a lower APR, but usually have to pick. The 0% rate seems like a no brainer, but that’s not often the case.

First of all, for buyers with bad credit, the decision is easy. The promotional APR is usually reserved for those with good scores, Experian estimates you’ll need a 740 score. You don’t often need that score for the discounts. Also, if you don’t have a lot of money to put down, taking the cash back is hugely important, so you don’t end up in a negative equity situation.

Just as importantly, even for the highest qualified buyers who have a down payment, taking the cash back amount off the purchase price of the sale, can often make the most financial sense. Let’s run through a few scenarios.

Kira has a credit score of 750 and has $5,000 to put down. She’s got her eyes on a nice Accord for $30,000. Honda is offering 0% financing or $7,000 cash back. A 0% rate on a $25,000 loan financed over 60 months has monthly payments of $417, and a total payment of $25,000. A 3.5% rate on an $18,000 loan financed over 60 months is $327 a month, and a total payment of $19,647. Here’s a case where the cash back makes the most sense.

Karissa is in a different boat. Her score is 760, so she’ll qualify for that 0%. She has $2,000 to put down, and wants a fully loaded Mini Countryman at $41,000. Mini is offering 0% financing over 48 months, or only $3,000 cash back. If she selects the 0% option, she pays $650 per month and $39,000 over the term. If she selects cash back she pays $709 per month, and $42,569 over the term. She’s one that should take the manufacturer’s financing.

Our last example is Michael. He has a great credit score of 805, a down payment of $10,000, but is looking at $82,000 F150. Ford is offering a longer-term 0% APR over 72 months, or $10,000 back, he’s preapproved at 3.5% also for the longer 72-month term. For him the numbers work like this; the 0% APR gives him a $1,000 monthly payment, and total over the life of the loan of $72,000. The 3.5% rate has a monthly payment of $956 and pays of $68,828. He’s another one who benefits from selecting cash back.

Everybody should have financing set up before they go shopping. Even if the manufacturers financing option makes the most sense for you, it’s important to know what you could get elsewhere to do those calculations.