Q. How do I evaluate different auto financing deals and determine which option is better?
A. It could be tricky to compare two auto financing offers. For example:
Option 1: $30,000 auto loan with 0% interest rate for 3 years
Option 2: $30,000 auto loan with 0.9% interest rate for 5 years
Which option is better?
The answer is - it depends on your cost of money.
For the above example, you can look at it the following way:
With option 1, you have $10,000 cash outflow each year during the next three years.
With option 2, you have $6,138 cash outflow each year during the next five years.
Don't simply add the cash outflows in each option and compare which number is great, and conclude the bigger the number, the more expensive the option is.
This's the wrong approach!
You need to consider your cost of money, say it's 5%. This means, if your money is not used to pay back the auto loan, you can invest and get 5% annual return.
Now you may realize the $10,000 cash outflow in option 1 may not look like a good deal, since it occupies more money during each of the next three years, and you could otherwise use the extra money to invest and get 5% return!
However, option 1 has an advantage in the years 4 and 5 because it stops paying back the loan.
So, net net, which option is better?
You can use our free online Auto Loan Financing Option comparison calculator to check the answer and play around with your own scenarios.
A. It could be tricky to compare two auto financing offers. For example:
Option 1: $30,000 auto loan with 0% interest rate for 3 years
Option 2: $30,000 auto loan with 0.9% interest rate for 5 years
Which option is better?
The answer is - it depends on your cost of money.
For the above example, you can look at it the following way:
With option 1, you have $10,000 cash outflow each year during the next three years.
With option 2, you have $6,138 cash outflow each year during the next five years.
Don't simply add the cash outflows in each option and compare which number is great, and conclude the bigger the number, the more expensive the option is.
This's the wrong approach!
You need to consider your cost of money, say it's 5%. This means, if your money is not used to pay back the auto loan, you can invest and get 5% annual return.
Now you may realize the $10,000 cash outflow in option 1 may not look like a good deal, since it occupies more money during each of the next three years, and you could otherwise use the extra money to invest and get 5% return!
However, option 1 has an advantage in the years 4 and 5 because it stops paying back the loan.
So, net net, which option is better?
You can use our free online Auto Loan Financing Option comparison calculator to check the answer and play around with your own scenarios.
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