Question

Buying a Car Scenario

Jess wants to move out of her apartment she shares with Nick, Winston and Schmidt (and sometimes Cece and Coach) and also needs a new car, so she has some important decisions to make.


A. Jess found a car she wants for $17,000. She has excellent credit so they offer her a special deal: $1,500 cash back OR 0% financing. If she took the $1,500 cash back deal then her loan interest rate would be 3% from the bank. Or she doesn't take the cash back and gets a 0% interest rate on her loan from the dealership. If she plans on financing the car for 4 years (or 48 months) which deal is better for Jess and why? (Assume the cash back offer is used to lower the price of the car.)




B. Nick finds Jess a different car at another dealership for $15,000 that she likes better. The interest rate is 6%. What would her monthly payment be if she financed the loan for 3 years (36 months)? What would her monthly payments be if she financed the loan for 5 years (60 months)? How much more in interest would she pay in total if she financed the loan for 5 years over 3 years? Which should she chose and why (how would the decision affect the rest of her budgeting decisions)?





please help

Answer 1

For Jess, it would be better to take the 0% financing deal instead of the $1,500 cash back deal if she plans on financing the car for 4 years (or 48 months). This is because if she takes the cash back offer, her loan interest rate would be 3% from the bank which would make her monthly payment $383.57 and her total interest paid over 4 years $1,322.96 ¹. However, if she doesn't take the cash back and gets a 0% interest rate on her loan from the dealership, her monthly payment would be $354.17 and she wouldn't have to pay any interest over 4 years ¹.

• For Jess's second scenario, if she financed the loan for 3 years (36 months) at an interest rate of 6%, her monthly payment would be $458.72 ². If she financed the loan for 5 years (60 months) at an interest rate of 6%, her monthly payments would be $290.78 ². If she financed the loan for 5 years instead of 3 years, she would pay $2,524.80 more in total interest over the life of the loan ².
• Jess should choose to finance the loan for 3 years instead of 5 years because it will save her money in total interest paid over time ². However, this decision will affect her budgeting decisions as well since she will have to make higher monthly payments for a shorter period of time which may affect other expenses in her budget.

Source:

1. Should You Take A Rebate Or 0 Percent Financing? | Bankrate.
2. 0 APR Guide: What You Need To Know Before Financing a Car.
3. Low-Interest Financing vs. Cash Back | U.S. News.