Buying a Car: Used Versus New.

Mar 22 2008

Published by UltraYeah at 1:46 pm under Cars

I was listening to the radio today and I heard about Chevy’s promotional deal-60 months with 0% APR on their new cars. So what does this mean financially? Well if you can already have enough money to pay the car full, you shouldn’t; instead, you should pay the minimum down payment and take advantage of that 0% APR by getting financed. This is essentially the future value of money concept.

Say the car is $30,000 and you take a loan for the full price; You would be paying 500 dollars for 60 months. If you already had $30,000 you would have $29,500 in the second month, after you pay your first installment. Even at a 3% savings account, you can earn 73 dollars that month(assuming you put $29,500 in savings) . The following month you’ll have 29,000 and earn an interest of $72. After you pay off the car you will have made $2212.

Now you earn interest off the interest you make too! For instance, the 73 dollars you make the first month goes back into your savings and you make 11 dollars annually; the total savings on your interest-on the gains from previous paragraph- totals to be 224$.

Additionally, you can pay your loans off manually by credit card. Take advantage of that 1% or even 5% that credit cards offer. Since the monthly payments are $500 you’ll make 5 dollars a month by paying with credit card, which saves you 318 dollars; I included interest in the compounding of 1% of 500 monthly. Another good thing about credit cards is, you can delay your payment by another month, or a few months if you have 0% APR on your card. Because you’re delaying loan payments with your credit card, you can earn additional money putting it in savings.

These values are very conservative. If you invest your money into something else, such as mutual funds or stock, you can potentially earn a greater interest. Even by using small yield savings rate I managed to save 3.2k over 5 years by taking the loan instead of paying all in cash. This just goes to show that, when given a chance between paying in cash or taking a loan, you should take the loan: The future value of money is always more than the present value.

If you’re thinking about used car, forget about the strategies above: The interest rates on used car loans are massive-usually around 8%. The advantage about used cars is it’s a lot cheaper; Cars depreciate faster than a half eaten sandwich, that’s you can buy 2007 models for almost 10k cheaper! Additionally, if you’re buying from a private owner, you don’t’ have to pay tax because there are some loop holes to avoid it; they can claim the car as a gift, thus not paying taxes. But prepared to buy the used car in all cash, or take a loan with a high %APR.

The bottom line is that if you buy a new car you can get great financing; If you get 0% APR you don’t lose any money! If you’re buying a used car you will lose the interest earning potential and maybe even pay interest. But you will be paying a lower initial price.

If Chevy runs their promotion through the summer, which they probably will, I might get a Tahoe Hybrid! I think their some tax credits that car gives too, which will save me even more money.