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Discussion Starter · #1 ·
There's another active thread about spreadsheets, which got me thinking about using one to determine which is a better deal.... 0% financing over 48 mos, or $500 cash discount.

So, the finance amount is, let's say, $16,000. At 0%, that's $333.33 payment per month. Let's also say I have that money, and put it in a daily interest account that pays 2.35% interest.

I just made a spreadsheet that starts with the opening balance of $16,000. On the first day of each month, the $333.33 is debited. On the last day of the month, bank interest is credited. For the monthly interest calculation I used...
Interest = (Balance*(1+(Interest/365))^DaysInMonth))-Balance.
I don't know if that's perfect, but maybe good enough for "wet finger" estimations? If the finance payment were to come out in the middle of the month, the daily interest would need to be split into before/after the payment.

What it shows, after 48 months, is a final balance in the account of about $786. That's the interest accumulated over the 4 years. That seems to me like a better deal to finance it rather than the $500 up-front cash discount.

Now, if I were to use an account that only pays 1.25% interest, the end of term balance is $406. In this case the up-front $500 to pay cash looks like a much better deal.

So, am I leaving anything out that needs to be considered? Is my logic even correct? Of course, interest rates my rise ( or fall ) in the 48 months, and inflation can possibly make that $768 buy less in 4 years than the $500 does today (Canadazuela ?), but how can that be factored into a spreadsheet?
 

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For the monthly interest calculation I used...
Interest = (Balance*(1+(Interest/365))^DaysInMonth))-Balance.
I don't know if that's perfect, but maybe good enough for "wet finger" estimations?
It's only a little off for such low rates. Your 2.35% is actually 2.38% with that formula. You should use Interest^(1/365) instead of Interest/365. But I think you could just assume all months to be equal and use Interest^(1/12) every month. It won't make a big difference.

Also, if you're comparing against 786$ 4 years from now, I think you should also apply 4 years of compound interest to the 500$.
 

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You have 2 options. Get a $500 discount. Or finance your $16,000 over 48 months interest free , pmt of $333. Then compare the FV in 4 yrs of both. We can assume the savings 2.35% return for both.

Option 1 - Interest Free
$16,000 earning 2.35%, pmt = $333, rate = 2.35%/12, term = 48 months
So I did FV (.00235/12, 48, -333,16,000) = $833

OPtion 2 $500 discount

FV $500 at 2.35%, term = 48 = $549

I get similar #s to yours.
 

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Discussion Starter · #4 ·
Thank you both for the advice. I had used the FV() function before, but didn't think it applied to this situation, hence creating a 48 month spreadsheet ( mostly cut & paste ).

No matter how precisely I calculate the monthly interest earned, it appears to me that financing at 0% would be the better option if the money is kept in an account earning more than 2% interest.
 

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Keep in mind that you are paying a car loan with after tax dollars and earning in a savings account pre-tax dollars. You should discount any interest rate in a savings account by your marginal tax rate (what you would pay on an extra dollar of income). All that said, 2.4% is a pretty cheap loan. You would likely be better off using the loan and prepaying mortgage or investing, depending on your circumstances.
 

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Discussion Starter · #6 ·
Actually, the plot has thickened....

It's not a car, but a yard tractor. I got a 2nd quote from another dealer; he provided a lot more detail. His cash discount is $655. Also, every one of the optional attached implements, like a snow thrower, have a discount for cash purchase. In addition, there's a $260 administration fee for financing ( whatever the heck that's for ). Bottom line, the all-in cash price is $15,410. and if financed 0% over 48 mos is $16,646.

Now, the cash purchase looks like the better option. The "0% -or- cash discount" offer ends Feb 28, so I have a few more days to play with the numbers. I don't see how I can make up the $1200 difference with 48 months HISA bank interest - especially, as andrewf points out, the interest is taxed.
 

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Agricultural / farm equipment dealers often outsource their financing. The admin fees help to pay the agent and the paperwork is eventually passed along to an institution - such as TD Auto Finance. At least that's how it has worked in my experience.

In your situation I'd take the cash deal!
 
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