Thinking of paying cash for that new car? It could cost you.
Recently my parents purchased a Honda Odyssey minivan. They were all set to pay cash when I explained to them that it might actually cost them less, in the long run, if they financed it.
How can this be? Well, while the seemingly unending rise in interest rates may be bad news for those with adjustable rate mortgages and credit card debt, it presents a nice opportunity for those with money in the bank...
You see, each time interest rates rise, there is an almost exact corresponding increase in the rate of interest that competitive banks pay to those with savings, money market or interest bearing checking accounts.
A quick check over at BankRate.com shows that one could earn in excess of 5% interest on their money, with little or no minimum balance requirement. So, if you were to pull the cash out of such an account to pay for a car, it would cost you the 5% interest you could be earning. However, if you left that money there and took advantage of some of the low interest finance offers that are being advertised in an effort to promote sales, you could actually come out ahead. With rates as low as 0% financing being offered (with no option to take cash back instead), you can finance the vehicle for the promotional finance period and keep your money in the bank, earning that 5% interest. You would just simply pull from that account when it came time to make your payment every month. In the case of my parents, they financed their Odyssey for 36 months at 2.9%, so they are actually making 2% on their money during the finance period, close to $800 in fact. That $800 will certainly help mitigate rising gas prices.
- Posted by
- Lee Scott August 3, 2006, 6:03 AM
- Permalink
- Categories:
- Car Buying, Car Loans and Financing
Correct me if I'm wrong but usually when you take those nice financing deals, you have to pay close to MSRP prices.
Paying cash allows you to take in some cash rebates if any.
Maybe its different in Canada....
So it might be a better deal but check the deals carefully :)
Plus, we get taxes like crazy so even if you gain some money from interest...its taxed away :)
I just did much the same thing, bought a new 2005 Nissan 350Z and financed half of it through my credit union at 4.9%. I would otherwise have had to sell some mutual funds that were earning around 7 - 10%, so I came out ahead.
Price was nowhere near MSRP; I got better than $6,000 discount off of sticker.
Usually I'm a cash buyer too, but this time it did work out better to finance.
corrswitch, Lee wrote, "With rates as low as 0% financing being offered (with no option to take cash back instead),..." If there is a rebate offered as an alternative to low-rate financing, then a buyer should run the numbers for that option to see which is the better deal.
I, too, wonder if a buyer can get a car with low-rate financing for the same price s/he would pay if s/he paid cash. Note that while biancar wrote that s/he paid a lot less than MSRP, s/he financed through his/her credit union and not the dealer or manufacturer, so as far as the dealer was concerned, s/he paid all cash.