Pay cash or interest-free financing?

When buying a new vehicle, many consumers must decide whether to pay cash or rather benefit from financing provided by the manufacturer. The reality is that manufacturers often offer better interest rates.

Take the example of a purchase of a vehicle that costs $ 20,000 everything included. If you opt for the 0% interest financing formula over 96 months, you will pay $ 208.33 a month for eight years, for a total of $ 20,000, which is not a surprise.

But, and this is where the question arises, it frequently happens that the dealer gives you a discount if you choose to pay out of your own pocket. Using the same calculation here, but by paying cash for the car, the dealer agrees to give you a discount of $ 3,000. Your car will ultimately cost $ 17,000.

So far, the calculation seems quite simple. But suppose you do not have $ 20,000 cash, is there a way to take advantage of the discount?

Returning to our example of a vehicle costing $ 20,000, taxes and other costs of course included. To obtain the money required for the cash purchase, you decide to call your bank. Some financial institutions offer rates that can sometimes be as low as 3% over 5 years.

For the same purchase, you borrow $ 20,000 over five years at a normal rate of 5 %. In this context, and without any payment from you, your monthly payment would be $ 377.42 (which is higher it is true), but even including the interests of $ 2,645.48, you save almost $ 400 taking into account the cash discount. In addition, instead of prolonging the payments for eight years, you stop paying after 5 years, which guarantees a higher resale value.

“It all comes down to simple math and figuring out the total cost of each alternative,” says a financial services representative at Bruce Ford.

Ultimately, the answer is purely mathematical, but let’s not forget to take into account the length of the contract. 96 months is a long time at the wheel of the same car, so no matter the interest rate, the shortest period is always best.