# Value of car promotion 0% for 5 years



## none (Jan 15, 2013)

So what do people think the value of this is? Assume that there is no "cash price" which is what I see more and more. Seems like different departments run theses promotions rather than the dealership.

I figured that for a 30K car 5 years at 0% is worth about $5000.

THis came about b/c I was looking to buy a relatively new Mazda 3 - I went back and for with someone selling it. They started at 23,500. I offered 20,500. They eventually found someone who bought it for 23,000. That's a bit crazy.


Lets review the math:

For yours the total price was: $23,000 * 1.12 taxes = $25,760

The one I just priced out Mazda 3 Sport GT with premium= 

$33,220 (all taxes & Freight) 
- 1,500 (Mazda retail cash; means nav, hitch and roof racks are free) 
- $5,000 (equiv of 5 years at 0%)
____________________________
Total $26,720. 

That's without any haggling at all. How strange. Why would someone buy an almost 3 year old car to save $1000? Really it's the 5 year at 0% that changes the math. If that didn't exist then I would agree that 23K was a decent price to buy it. 

Is the value I place on the 5 year at 0% wrong?


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## Joebaba (Jan 31, 2017)

Hi,

By my calculations, at a loan rate of 4%, your payments would be $581 per month.
I assume your payments at 0% are $529 ($31,720 divided by 60).

So that means you’d save $52 per month.
For 60 months that adds up to $3,120.

Now that doesn’t include NPV (net present value) – meaning some of those savings are in dollars 4 and 5 years down the road, so they are worth a bit less in today’s dollars.

The loan rate makes a big difference. At 5% your payment would be $594 per month so you’d be saving $3900.

Joe


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## m3s (Apr 3, 2010)

With used cars I think you kind of have to have the knack for where the circumstances play in your favour. Most used cars I buy are obvious deals and it's because of a combination of location, vehicle model less popular with the masses and life circumstances. Typically people having kids, divorces etc have higher priorities than selling a used vehicle that few people are shopping for in the boonies for top dollar

Some popular cars with the masses like Mazda 3 or Civic in the GTA etc are hard to find a deal on because people who are having kids or divorces or busy city lives etc have higher priorities than finding the best deal on a car and pay irrational amounts. It seems to work both ways. When I did the comparison I got a slightly used car for half the cost of new, paid cash and invested the thousands upon thousands saved.


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## none (Jan 15, 2013)

m3s said:


> With used cars I think you kind of have to have the knack for where the circumstances play in your favour. Most used cars I buy are obvious deals and it's because of a combination of location, vehicle model less popular with the masses and life circumstances. Typically people having kids, divorces etc have higher priorities than selling a used vehicle that few people are shopping for in the boonies for top dollar
> 
> Some popular cars with the masses like Mazda 3 or Civic in the GTA etc are hard to find a deal on because people who are having kids or divorces or busy city lives etc have higher priorities than finding the best deal on a car and pay irrational amounts. It seems to work both ways. When I did the comparison I got a slightly used car for half the cost of new, paid cash and invested the thousands upon thousands saved.


Huh, that's interesting. Anything that you would recommend? I'm not a gear head at all. I'm not a huge car fan b/c I have the car sharing and rentals dialed in pretty great


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## Jimmy (May 19, 2017)

Your savings is through inflation paying $33,220 over 5 years vs up front. The PV of those payments at 2 % is $31,587 so you save $1,632. 

$33,220 Price
-1,500
-1,632 
___________

$ 30,087 Total


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## STech (Jun 7, 2016)

none said:


> Huh, that's interesting. Anything that you would recommend? I'm not a gear head at all. I'm not a huge car fan b/c I have the car sharing and rentals dialed in pretty great


My wife also liked a Mazda 3 for it's handling, and decent looks. But with a 1 year old kid, we needed something a bit bigger, as long as it wasn't a minivan. She hates minivans. So we settled on a Mazda 5, which basically is a Mazda 3 with a bigger body, and sliding door. 95% of the parts are interchangeable.

The Mazda 5 is a bit of an oddball duck. It's not a car, and it's not a minivan. It's not terribly popular, and not too many people know what it is. That means the used market will be priced well. We ended up buying a 2.5 year old off lease, 85,000 KMs, and warranty until 140,000 for less than half of new. We paid 11 and new at the time was 25 for the fully loaded GT. Not a bad deal at all.

It's been a good car, and my wife is still in love with it. I like driving it from time to time, because it's handles surprisingly better than it looks, but on long drives I find it a little cramped for my height. But back to your point. It's absolutely true, sometimes buying used at such high prices makes no sense at all. I like to buy quality tools and equipment, and when I look at used stuff, they're hardly 10% off brand new, so I go buy the new stuff with warranty. Popular cars from Mazda, Toyota, or Honda, will always command a higher price. Sometimes the discount between new and used isn't worth it as you pointed out.


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## none (Jan 15, 2013)

Jimmy said:


> Your savings is through inflation paying $33,220 over 5 years vs up front. The PV of those payments at 2 % is $31,587 so you save $1,632.
> 
> $33,220 Price
> -1,500
> ...


Well if I had to sell 30k worth of investments that spin off an average of 5-7% then I think it would be closer to my $5000 estimate


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## ian (Jun 18, 2016)

If you can get 0 percent financing and they will not give you a bigger discount for cash, then simply figure out the after tax dollars from the monies that you would invest in whatever it is you invest in. Or simply use the monies to pay down debt, mortgage, whatever. Just remember to compare after tax dollars to after tax dollars.


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## Jimmy (May 19, 2017)

none said:


> Well if I had to sell 30k worth of investments that spin off an average of 5-7% then I think it would be closer to my $5000 estimate


Hopefully they would offer interest free financing or a discount for cash.


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## none (Jan 15, 2013)

Jesus jimmy. That's the whole point. Yeash


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## Jimmy (May 19, 2017)

none said:


> Jesus jimmy. That's the whole point. Yeash


Then get interest free financing. You were the one talking about cashing investments earning 5-7%


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## none (Jan 15, 2013)

Jimmy said:


> Then get interest free financing. You were the one talking about cashing investments earning 5-7%


Jesus, it's like talking to a brick. The WHOLE point of this thread is obtaining a reasonable estimate of what 0% financing is.


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## m3s (Apr 3, 2010)

none said:


> Huh, that's interesting. Anything that you would recommend? I'm not a gear head at all. I'm not a huge car fan b/c I have the car sharing and rentals dialed in pretty great


Mazda 3 is a really good car but the thing is the vast majority who are not gear heads who spend 5 minutes googling what car should I buy will likely come to the same conclusion. So the resale on these popular models is really good but really a used car you should care more about the circumstances and what situation the particular car is in rather than if it's a good model. If you want a reputable model based on your numbers new sounds like the way to go.

Getting a deal on a used car is kind of a black art. The good deals always go fast.. so you kind of have to be able wait patiently, be able to watch for and identify a deal, and be ready to pounce on the deal fast. There are people who need to sell very fast for various life reasons and you won't find these deals by searching kijiji in 1 day. Then you kind of have to be able to assess what is truly a good deal fast so that requires either being able to read people and/or cars well.

I think location plays a major factor as well because the vast majority won't travel very far just to look at a used vehicle. In my experience it can be easier to find better deals in smaller towns because they don't sell as fast. I'm trying to sell something in a small town now and most interested people just don't want to travel to see it. Also 10,000kms driven in a major city is far worse wear on a vehicle than 10,000kms in a small town etc.


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## Jimmy (May 19, 2017)

none said:


> Jesus, it's like talking to a brick. The WHOLE point of this thread is obtaining a reasonable estimate of what 0% financing is.


Yes it is. Not my fault you can't seem to understand the simple math we have been trying to point out to you and correct you on.


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## none (Jan 15, 2013)

_whoosh_


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## janus10 (Nov 7, 2013)

I recently had a similar decision. Sell investments (some of which would incur capital losses, so tax loss selling, but others would have incurred capital gains) or borrow money from my HELOC or take the 7 year 0% financing.

This was a brand new vehicle - there weren't any used vehicles that had what I wanted, not even a demo.

I believe that the incentive to pay cash started at an extra $2k off. Perhaps I could have negotiated some extra beyond that.

I did negotiate on the price anyway and I believe I got a good deal because two other dealerships that I visited couldn't match my final deal let alone beat it.

So, in the end I had to decide whether I could generate profits from holding onto that money for 7 years (but factoring a in my monthly repayment) would be greater than the $2k+ cash I'd save today.

No brainer for me. Kept my money working hard for me.


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## Joebaba (Jan 31, 2017)

None,

Here’s the problem…..

You’re asking us to help give you a reasonable estimate of what 0% financing is worth.
We’re trying to do that, but you want to include a number of variables that we can’t possibly know.

After 3 posts, you added “well if I had to sell investments that spin off an average of 5-7%”.
Well there's a couple of problems. Firstly, you didn't originally ask us to consider that. Secondly, are you talking 5%? Or 7%? Or 6.23%. The value you choose makes a huge difference.

And how do we know that there aren’t tax implications? So if NOT taking the 0% financing (paying cash for the car), means you have to sell investments that incur capital gains, then that factors in big time. 

What you’re really asking is, “Should I leverage a loan, secured by my new car, and invest the money?”.
And we can’t tell you that

All we can do is to answer your first question – “Is the value I place on the 5 year at 0% wrong” – and I think Jimmy has answered that.

Joe


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## m3s (Apr 3, 2010)

I wouldn't even compare it to after tax investment returns. If anything I would compare it to after tax interest income on cash. Reason is that registered investments should take priority over buying a shiny new car. You can buy a car for any price.

If I'm buying a shiny new car, it's because I have $30k cash sitting in my savings account and I've already maxed my investments and emergency accounts first. Otherwise you should buy a used car that you have the cash on hand for.

Not borrowing for depreciating assets increases cash flow to save for the next while driving the current. If you follow this strategy you will have more cash every time you sell a car for the next and within 10 years you'll be buying M3s in cold hard cash


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## ian (Jun 18, 2016)

What's to decide???

Nothing or free money for five years. You pick. How hard can this decision be?


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## Rusty O'Toole (Feb 1, 2012)

If you are not a gear head and can afford the monthly payment you may well be better off to buy the new car. Wash and wax it a couple of times a year, have it maintained by the book by a good independent mechanic (not the dealer) and plan on driving it for 10 years or more. Buy a Toyota or Honda, they have the best reputation for durability and the best resale value.

I'm sure an accountant could give you the exact figures. But whatever, spread over 10 years the difference isn't much. And if you own the car from new you know it was broken in properly and serviced properly. A new car today can easily go 10 years and 300,000Km without a breakdown or major repair.


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## ian (Jun 18, 2016)

Bought my 1997 Camry new. Slightly under 400K on the clock. No major repairs, no leaks, does not burn oil. Son has had it for two years. He is not doing regular mtce so how long it lasts is anyone's guess. Expect our 2006 Accord to last another 10 years. And the 2007 Solara convertable that we recently purchased...well who knows?


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## none (Jan 15, 2013)

Thanks everyone. I'm still kicking around the idea. I have the 'car free' lifestyle dialed in so well that owning a car really feels like just flushing cash down the toilet (even though I have the cash for it).

I've started looking for cars that don't hold their value b/c they're a bit weird. I kind of like the Volvo C30 (modern day gremlin!). I've found a few online but they're pretty rare and there are none for sale on Vancouver island. I'd like to at least test drive one first.


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## Nerd Investor (Nov 3, 2015)

It's really a simple NPV problem, the only tricky part is coming up with the discount rate. I know when I bought my car years ago (at 0.9% financing) I used 3% as a relative conservative investment rate you expect.


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## peterk (May 16, 2010)

It's tempting to use a "typical" investment return (5-7%) when you do this comparison... but you really can't use anything except no-risk guaranteed income as a discount rate, since the opposite side of the transaction is a guaranteed debt (there's no chance that you will not be required to make payments for the car).

Think of it, you have this:

---$X portfolio + $30k

you can either do:

---$X portfolio + Car

or:

---$X portfolio + car + $30k + debt

you cannot compare to:

---$X-30k portfolio + car + $30k

or:

---$X+30k portfolio + car + debt

as both these scenarios are changing you asset allocation, and it is no longer a fair comparison.

Using a 2.5% rate, which is 1.5% after tax, to be realistic, the NPV of a $500/month payment for 60 months is $28,885.


One last thing, what is your plan for insurance? A financed car must be insured thoroughly, as required by the lender, for the duration. You are a middle aged guy with a good job and extra money. It is quite possible that the best decision is for you to self insure, especially if you buy used and can plunk down 20-30g's without much hesitation.


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## banjopete (Feb 4, 2014)

none said:


> I have the 'car free' lifestyle dialed in so well that owning a car really feels like just flushing cash down the toilet (even though I have the cash for it).


It is. So what's the intrigue? It's money on money, money to buy, maintain, feed (gas and oil), insure, and depreciate, all to make you fatter, willing to commute farther, and less happy, and fatter again as a result. ugh. I like cars, or I think I do, but the more I ride my bike year round for commuting, the more I look at the cars we own with a wtf? eye.


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