No BS Finance

Going to buy a car can be fun. It can also be a huge headache with the various incentives out there - which ones make the most sense?

When we bought a minivan a few months ago, we had three choices for paying:

• cash
• get 1.9% financing
• get an extra $1,000 for financing at the “normal” rate - 7.9%

My first thought was to take the $1,000, finance at the high rate, then pay it off the first month since we had the cash available. Unfortunately Chrysler had already thought about this, it seems. The minimum loan amount was $10,000 and it could not be paid in less than 5 months.

Now I wasn’t sure which way was best. The 1.9% was tempting since we save at a higher rate than that at ING. Quick calculations in my head told me that taking the discount was still worthwhile, even having to spread out payments over 5 months. At least I had eliminated paying cash as the best option.

We chose to take the discount combined with the higher rate. Was it the “right” choice?

I ran the various scenarios in Excel to see which really was best. Both loan examples were figured out at the minimum term (5 months) and the maximum (60 months). I made additional assumptions, such as taking the longer-term loan meant you didn’t have the money saved up to pay it off quicker, hence no additional savings benefit. Conversely, if you took the 5-month loan, you do get the benefit of saving. I also simplified by assuming no additional savings were made after the car was paid off in the 5-month scenarios.
It turns out that the best way was to take the $1,000 and pay the loan off in 5 months. Interestingly, the second best choice was a 60-month loan at 1.9%, then the 5-month loan at 1.9%, then cash, and finally the 60-month loan at 7.9%.

If additional savings were allowed from month 6 to month 60, the 1.9% loans would flip in the order. That’s probably a more realistic assumption - you don’t end up saving enough to pay cash for a vehicle by just making ends meet every month.

In any case, here is the spreadsheet with my examples.