Buyers who want to own their vehicle have two options available to them when visiting the dealership. They can buy their vehicle outright by paying cash, or take advantage of various financing plans available with low interest rates. Indeed, no other industry provide such advantageous financing plans with interest rates that rarely are more than 5.0 %. Sometimes, there isn’t any interest at all!
It’s therefore difficult to choose between paying cash and financing, even if you have the money in your bank account. Sometimes, that money will be better off earning interest rate through investments while you pay for your vehicle using a low-interest financing plan.
That said, sometimes a new vehicle will be offered with a significant discount if you pay cash. This same discount isn’t usually available if you finance at a low interest rate. A little complicated isn’t it? Well, it’s a bit more complicated than it looks. The key, is to get all the variables together and then break out a calculator.
You will need to know the total amount paid for the vehicle with the financing plan, the amount paid when choosing the cash option, and how much interest you earn on an average investment with your financial institutions.
Let’s put some numbers to all of this.
Imagine a given vehicle costs $ 20,000 including all taxes. You can finance at 0 % for 60 months, or get a 2,000 $ rebate if you pay cash.
Therefore, paying cash will cost you $ 18,000 while financing will cost $ 333.33 per month for a total of $ 20,000. You seem to be losing out on $ 2,000 by not paying cash. However, the question is whether or not you can make up that $ 2,000 by investing the $ 18,000 in a savings account for five years.
Ultimately, you may want to ask your financial advisor for some help, but the key is to make sure you explore every option.
Thank you to Volvo of Oakville for their help with this article!