Zero percent financing deals are being advertised on almost every new car ad you’ll see these days. Sounds like a great deal, right? I mean, no interest, how can that be a bad deal? Well, one of my coworkers helped someone buy a vehicle recently and all it took was a simple math lesson to show why the 0% deal was not in their best interest.
Real life example:
The offer was simple. For a vehicle price of $50,000, the member had two options:
Option A: Finance the vehicle at 0% with no rebate
Option B: Finance the vehicle at 3% with a $9,000 rebate
Now let’s do the math:
Option A:
Interest Rate: 0% APR*
Loan Term: 60 months
Rebate: $0
Vehicle Price: $50,000
Full amount paid over the life of the loan: $50,000
Option B:
Interest Rate: 3% APR*
Loan Term: 60 months
Rebate: $9,000
Vehicle Price: $41,000
Full amount paid over the life of the loan: $44,203
The Result:
By taking the rebate option, the member saves over $5,700!
Decision driven by feelings and not math
So why is the 0% interest offer so compelling? My theory is that interest is treated subconsciously like taxes. No one wants to pay taxes, and the same goes for interest. The decision is based on feeling rather than simple math. By taking the time to do the math and taking the emotion out of the decision, the choice is clear in this case.
Don’t take my word for it
Use math to verify for yourself. If you find yourself at the dealership and are offered the 0% APR* interest rate or a rebate, use a financial calculator to do the math and make a decision that works for you.
*APR = Annual Percentage Rate
Post author: Jamieson Mackay, CCUFC
The opinions expressed on this page are for informational purposes only and is not intended to provide legal or financial advice. The views expressed are those of the author of the article and may not reflect the views of the credit union.