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Comparison of Auto Financing Options
Last year I started examining auto incentives because I knew I'd be purchasing a vehicle soon. (Is six months "soon"?) I've taken the math from that earlier article and turned it into an auto financing option comparison spreadsheet so I could conveniently see the results.
Spreadsheets are fun because it's so easy to play with the initial conditions. (I've highlighted them in blue.) You can see how the interest rates and durations, and the financing vs. cash incentives, and the size of the down payment interact. The hardest number to estimate, however, is the rate of return on investments — and it makes a big difference.
If investing is unattractive, paying cash is best because you'll get larger discounts on the vehicle price. If investing is moderately appealing, 0% financing wins because you can invest that money over the loan duration and earn more than the cash discount. If investing is hugely profitable, you'll want to aim for a very long loan term even at a moderate interest rate, because your investment earnings are higher as a result of paying for the vehicle more slowly. (Of course this assumes your investment earnings are higher than the interest rate on the loan.)
The spreadsheet's default values are my expectations for a LaCrosse CXS tricked out with options. I've assumed an after-tax rate of investment return of only 3.5%. Yeah, I guess I'm fairly bearish. With these figures, the 0% financing option is the winner by a substantial margin.
If I modify the spreadsheet for my Impala SS expectations of $28,500 and a $4000 cash discount, paying cash is the clear winner. In fact, the cash incentive is so good that even if you don't have the cash, you should finance elsewhere (even if it's at 6%!) so you're a cash buyer from the dealership's perspective.
I'm happy my intuitions turned out to be correct when I ran the numbers, but it's important to run the numbers. You should do it too — you've got the spreadsheet, so you've got no excuse.
FYI, you can see incentives for GM vehicles all in one place. Convenient!