Email question: Should I choose cash back or 0% interest when buying a car?

Pete,

My wife and I are looking at buying a new car. We’ve weighed the pros and cons of buying new vs. used and to make a short story long we decided to buy a new car based on a couple of different things.

1. The same model cars that are one or two years old are currently only $1500-$2000 less than the new ones ($18000 new or $16500-$17000 used).

2. The new cars have an offer of $1500 cash back or 0% financing for 60 months.

I had read your article regarding “cheap” money and was wondering if I could get your thoughts on this situation.

We currently get 2.5% back on our checking account (really this is our our savings account but the savings account gets bupkis% so we leave little in there) and have $10,000 to put towards a car. We can get a car loan from our bank at 2.2% so there is still have margin if we got the loan from our bank.

My question is would it be better to buy a new car and get the $1500 cash back (making the purchase price similar to a used car) with a small loan from the bank or finance the entire car at 0% for 60 months and let our $10k grow?

Much appreciation,

Alex

Hey Alex,

Great question! I can tell from your “short story long” that you and your wife are intelligent people making smart choices.

From the information you provided, I agree with you that in this case buying a new car instead of a used car is the smart choice. This is not the standard case though. By my math there is only an 8% difference between the new car and the slightly used car you mentioned, this is very low and uncommon. So again, I agree with you, but only in this case.

As far as the $1,500 cash back versus the 0% financing for 60 months goes, we’ll need to dig a little deeper. Here are a few factors you need to keep in mind:

– Your checking account earns 2.5% interest (which is amazing by the way, where do you bank??), which means if you left the 10k in your account it would earn about $250 this year. You are actually using the “cheap money” argument correctly, since the interest rate you would earn on your 10k is more than the interest you would pay for a car loan, but…

– Using the 10k as a down payment and taking the $1,500 cash back would lower the amount you would need to borrow to $6,500. Which in theory you could knock out pretty quickly. 

– Another option would be to use the 10k as a down payment and do the 60 months with 0% interest option. But really it all comes down to…

– Your motivation. What are you and your wife going to aggressively work on accomplishing? If you use the 10k as a down-payment, are you going to work hard to re-save the money? Or would you work harder to pay off a car loan? Would a 60 months deadline light a fire under you? Knowing what motivates you will play a role in how you make this decision.

– Also it’s worth asking, if you decide to use the 10k on a car, will it wipe you out entirely? I’ve found many people work super hard to save for a down-payment or car and then clean themselves out to make the payment. This is never a good idea. You need emergency reserves on top of any down-payment you make. If you have excess beyond the 10k then use the 10k to make a large payment, and get a loan for the remainder.

– I’m aware I didn’t cleanly answer this question. It’s a complex one and in all honesty you can do any of the above and you’ll be fine. Two responsible people like you and your wife are going to do fine whatever you choose.

I also answered your question on The Pete the Planner Radio Show this week on WIBC, listen below to hear a fuller answer.

Pete

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