In today’s economy we are in a buyer’s market. Because all industries, including the car sales and manufacturing industry, are struggling to meet quotas and get rid of the inventory they have sitting on the lot, you will see more deals than ever before. These deals will range from cash back incentives and higher trade-in values to an interest free car loan on new vehicle purchases. Many consumers are asking themselves if they should take advantage of these incentives and purchase a new family vehicle, or stick with the reliable car they have been driving for the past five years.
There are many things to consider before signing on the dotted line, whether the loan is interest free or not. The first thing to remember is that finance companies and dealerships are still businesses, and although they are struggling they will not make a deal that they will not profit from. Generally interest free car loans mean inflated retail prices and high pressure sales tactics to purchase “extras”. The reason dealerships are struggling so much is more than likely because consumers are skipping the high pressure salespeople all together and buying used from private owners. o is it a smarter choice to buy a brand new vehicle interest free, or a used vehicle with interest?
The first important fact to realize is that new vehicles have the highest rate of depreciation. The saying that once you drive a vehicle off the lot, it immediately depreciates is entirely true.Even though you are putting a large sum of money into a vehicle, an investment technically speaking brings you a rate of return for the money you spend. With a new vehicle, this is not the case. Depending on the make of the car, a car will depreciate between 10 and 15 percent of its purchase price in the first year of ownership alone.
After you understand how much your vehicle will depreciate within the term of the loan, you can then determine how much you are saving as far as interest goes. Because an interest free vehicle sold by a dealership is generally inflated between 2 and 5 percent for sales price, it is safe to assume that depreciation of 10 percent a year for five years will be an accurate calculation. Assuming the purchase price was $20,000, your vehicle has depreciated to nearly half of its value at the time of purchase to nearly $12,000. This is a drop of $8000 in value.
Now you should review how much interest you would have paid during this five year period. For the average consumer with decent credit, a $20,000 loan for a period of five years at 5 percent interest will cost approximately $2600 over the life of the loan. When you compare these two numbers, are you truly saving? If you must buy new, it may be recommended to ask the salesman for other incentives other than zero interest.
Most manufacturers with give you an option. Bluntly speaking you take either zero percent interest or $5000 cash back. While many assume that the zero interest is in their best interest, do your research wisely. Unless you are receiving an interest rate of 15 percent, you are not benefitting from the interest free car loan over the cash back option. Another advantage you have with this that many overlook is that in the event you take the cash back incentive, you are not required to finance through the dealer. While they will pressure you into pre-approval, you can contact your bank and receive more than likely a lower interest rate and still receive the cash back.
Dealerships believe they can outsmart consumers by offering deals that sound too good to be true. Honestly, these deals are just that: glorified expressions to make it sound much better than it actually is. If you are in the market for a car, do your research and find cash back incentives, and outsmart the dealer who is trying to outsmart you.
Financing