I'm buying a new car this weekend and not really sure I understand the financing options that are available to me. Hoping someone with more fluency around this stuff can check my math and logic and let me know if my thinking & numbers make sense.
TL;DR: I'm trying to understand how loans work over the long term & find the optimal balance between cash payments vs. loan amounts.
Let's say the cost of the car is $24,000.
My two options are:
- Getting a $1,500 manufacturer incentive for the cost of the car (bringing the price down to $22,500) and borrowing through them: $22,500 at 2.99% apr for 66 months.
- Instead taking the other incentive, which is the full cost of the car (24,000) at 0% apr for 66 months.
With Option 1, I think the breakdown is this:
Amount of loan needed: $24,000
Amount of loan needed after $1,500 dealer incentive: $22,500
Total Interest paid at 2.99% apr for 66 months on a $22,500 loan: $1,928.70
Total paid: $24,428.70
With Option 2, the cost is $24,000, and 0% apr for 66 months is … $24,000.
So all other things being equal, I'm paying $428.70 more with Option 1. Is that right?
Now…does that logic break down if the cost of the car drops?
Changing assumptions, let's say I intend to put $15,000 cash towards the purchase price of $24,000, making the potential loan amount be $9,000.
With Option 1:
Amount of loan needed: $9,000
Amount of loan after $1,500 dealer incentive: $7,500
Total Interest paid at 2.99% apr for 66 months on a $9,000 loan: $642.90
Total paid: $8142.90
With Option 2:
the cost is $9,000, and 0% apr for 66 months is … $9,000.
In this scenario, if I take advantage of Option 1, I'm coming out ahead $875.10. Is that right?
Finally, is my best move here to balance my cash down to amount borrowed such that I wind up paying an amount in interest equal to the $1,500 dealer cashback incentive? So:
Cost of car: $24,000
Cost of car after $1,500 dealer incentive: $22,500
Upfront cash payment of $5,000 of the available $15,000 = $17,500 to borrow
Total Interest paid at 2.99% apr for 66 months on a $17,500 loan: $1,500.10
Total paid: $22,500
Then use the remaining $10,000 in cash I have to cover ~35 monthly payments of $288.
If you take the time to think through this and give me advice, you're a saint!