# 0% loan for vehicle



## clovis8 (Dec 7, 2010)

Perhaps I am missing something but if I was to get a car loan at 0% I would want the term as long as possible correct?


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## Guban (Jul 5, 2011)

Sounds right. You'll likely get a better price if you pay with cash, however. Someone has to pick up the cost of "free money".


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## GoldStone (Mar 6, 2011)

Some manufactures don't offer cash discounts. Get the car pricing report at CarCostCanada or Unhaggle. You will find out if and how much you can save by paying cash. That will also tell you the true cost of the "0%" loan.


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## GalacticPineapple (Feb 28, 2013)

The catch with the 0% is you are paying a crappy price, so they're effectively folding the interest into it. But yes if you agree to that price, you might as well stretch it out as long as you can.


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## GoldStone (Mar 6, 2011)

Just noticed that Unhaggle shows the cash incentives right there on their web site. You don't have to request the car cost report (which requires filling out personal information).

This is Mazda3


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## liquidfinance (Jan 28, 2011)

You then need to factor in the return you are getting on the invested cash against the value of the rebates or cash discounts.


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## GoldStone (Mar 6, 2011)

Sure.

Basic Mazda3 MSRP: $17,195
Cash rebate: $3,000 or 17.45%

The true cost of 3 year financing is 4.1% (1.041 * 1.041 * 1.041 = 1.1744)

That is also your break-even after tax rate of return. Think you can do better than 4.1% after tax? Take the loan and invest the cash.


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## alingva (Aug 17, 2013)

Guban said:


> Sounds right. You'll likely get a better price if you pay with cash, however.


 This is the catch!!! What is 0% if by paying cash you get a cheaper deal?


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## doctrine (Sep 30, 2011)

If you don't want to pay cash, then yes move the 0% out as far as you can. If inflation averages 3% a year, then by year 5 you are getting a 15% discount on your payments.


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## m3s (Apr 3, 2010)

When you finance a car you have to fully insure it which is a huge waste of money. They will also put insurance on the loan without telling you (unless you read the fine print) another waste of money

Someone said in another thread it's just a hoax and the loan from the bank truly has interest (I don't know) I would rather it have interest honestly.. in case you want to pay it off for who knows what reason. If it's 0%, all the interest is just front loaded right?

0% only looks so good to the financially clueless imho. I would certainly ask a lot of questions, but I don't buy new cars.


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## pwm (Jan 19, 2012)

I agree with GoldStone and doctrine. I think the 0% interest option is a good deal. I bought my wife a new 2008 Pontiac Vibe in Sept 2008 and chose the 0% financing option for 5 years. I could have paid cash, but chose to keep my money invested instead. They are effectively lending you the money interest free to get the car out the door. Could I have gotten a better deal had I paid cash? Who knows, but I do know that my invested money has returned at least 4.5%, and my payments have effectively gone down by the compounded rate of inflation since 2008.

Not sure what M3S is referring to when he says you have to "fully insure it". My loan was with GMAC which became ALLY. There was no "insurance" or any other kind of admin fee. They simply took the cost of the car and divided it by 60 to arrive at the monthly payment. BTW the last payment was this last Sept 09. 

Now as for buying new versus used, that is an entirely different discussion. I've bought both new and used cars in my lifetime and both options have very valid pros and cons. I've been very happy with all the used vehicles I've purchased, and I would recommend that as an option, but in this case I thought my wife deserved a new car for once.


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## brad (May 22, 2009)

Here's more information on 0% financing and why auto companies do it:

http://www.computegassavings.com/zeropercentsavingscalc.html


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## clovis8 (Dec 7, 2010)

I would really appreciate some advice on my options;

background:

-My last car I purchased as a 1998 Ford Taurus which I drove for 10 years and need to upgrade now. 
-cash on hand 13k
-My personal finances are such that after all expenses (ie, food, mortgage, bills, gas, TV, phone, insurance misc) including $600/month in investing I would still be positive cash flow of $1600/month after making car payment and insurance on this vehicle.

I want to get a Mazda 3 GS-SKY and have these options;

1) financed at 0% for 84 months: price 23,408.07 + 604.18 in fees+ GST= allin price of 25,212.87 

2) I could probably scrape together the cash but it would wipe out my reserves: this would save me $2000 which is the incentive for paying cash

3) I could get a 2012 model for 21,150 at 5.4 % financing which has 12,000 km on it. 

I plan to drive the vehicle until it dies like my last one so depreciation is less of a concern for me.

I just signed up for unhaggle so hoping I might get a better price than the above in the end.


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## liquidfinance (Jan 28, 2011)

From my own experience my wife and I currently have a 2012 Kia Sportage purchased new.

5 Years 0% finanace.
Cash discount was not enough incentive to pull the investments. 

Over the last year the invested funds have earned in excess of 15%.

Seems like a no brainer to me. 

I have seen 0% offers on used cars though where the dealers hike the price of the car so you're paying the premium up front in the purchase price. Although I haven't seen this practice in Canada. 

Then there is the argument of not buying new because of the depreciation as soon as you get off the forecourt.

I'm happy with our decision. The money is in the TFSA earning a nice tax free return and I can pay the loan off any time if I wanted to.


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## liquidfinance (Jan 28, 2011)

clovis8 said:


> I would really appreciate some advice on my options;
> 
> background:
> 
> ...





> 1) financed at 0% for 84 months: price 23,408.07 + 604.18 in fees+ GST= allin price of 25,212.87


Assume the loan is a flat $25k payment is $297.62

$25K in peoples trust at 1.9% and using the saved principal to pay down the loan would earn you $1719.14 in interest. Less Tax (Better To pay Cash)
$25k in peoples trust TFSA 3.0% again using the principal to pay down the loan would earn you $2748 Tax free. (Better to take the Finance)

Of course this assumes the rates don't change. 

Paying the loan from your free cash and leaving the $25k invested of course changes the picture but the above gives the true picture of where the break even would be.

$25k in the TFSA at 3.0% would be worth $30833.87 after the 7 Years (Leave the money invested and sleep easy knowing you have cash on hand and could pay the loan off if required)





> 2) I could probably scrape together the cash but it would wipe out my reserves: this would save me $2000 which is the incentive for paying cash


Assume you pay the full value but then save the effective loan payment over 7 years.

After the 84 months this would give you roughly $27,722 and earning of $2774.55 inside a TFSA (A good option assuming you will save the value of the loan payment)




> 3) I could get a 2012 model for 21,150 at 5.4 % financing which has 12,000 km on it.


This depends on the term of the loan. The option I would least favour. 

In keeping with your 84 month example you would pay over $4000 in interest but this assumes no down payment.


*Useful Tools*

*Compound Interest Calculator*

http://www.getsmarteraboutmoney.ca/...ompound-interest-calculator.aspx#.UjfIXcasim4

*Loan Repayment Calculator*

http://www.bankrate.com/calculators/home-equity/loan-re-payment-calculator.aspx


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## alingva (Aug 17, 2013)

another list of calculators, just in case
http://www.moneyinside.ca/calculators.shtml


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## m3s (Apr 3, 2010)

pwm said:


> Not sure what M3S is referring to when he says you have to "fully insure it". My loan was with GMAC which became ALLY. There was no "insurance" or any other kind of admin fee. They simply took the cost of the car and divided it by 60 to arrive at the monthly payment. BTW the last payment was this last Sept 09.


Don't you have to fully insure a car you had to borrow money for in case it is totalled? You can't self insure. If you own the car outright, and can afford to total it and replace it in cash yourself, you will save a fortune over time. As you say, to each his own. The insurance on the loan is something they like to slip in to the total cost without telling you. When I looked at my friend's invoice I found it. There can be many reasons you want to pay off a loan early and 0% means there is no saving to pay it off early? Or is it really 0%?


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## brad (May 22, 2009)

liquidfinance said:


> I have seen 0% offers on used cars though where the dealers hike the price of the car so you're paying the premium up front in the purchase price. Although I haven't seen this practice in Canada.


But the point is: how do you know? The only way to test the hypothesis that Canadian dealers offering 0% don't jack up the price is to find out what the car actually costs to the dealer. Good luck with that. But it seems likely that in most cases you would find that when 0% financing is offered, the dealer increases the price of the car to cover the cost of financing. Most dealers don't handle financing directly: it's handled by another party. The dealer has an incentive to sell more cars, but the financer only has an incentive to make money off interest. So with 0% financing the dealer pays the financing agent the interest up front. How do they do that? Either by taking a loss or by increasing the price of the car so the consumer pays the interest. Or maybe they split the difference. Do you really think the dealers will take a loss on a routine basis? It seems like an unsustainable business model, unless they cover the cost by increasing the prices even more on the other cars they sell.


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## clovis8 (Dec 7, 2010)

brad said:


> But the point is: how do you know? The only way to test the hypothesis that Canadian dealers offering 0% don't jack up the price is to find out what the car actually costs to the dealer. Good luck with that. But it seems likely that in most cases you would find that when 0% financing is offered, the dealer increases the price of the car to cover the cost of financing. Most dealers don't handle financing directly: it's handled by another party. The dealer has an incentive to sell more cars, but the financer only has an incentive to make money off interest. So with 0% financing the dealer pays the financing agent the interest up front. How do they do that? Either by taking a loss or by increasing the price of the car so the consumer pays the interest. Or maybe they split the difference. Do you really think the dealers will take a loss on a routine basis? It seems like an unsustainable business model, unless they cover the cost by increasing the prices even more on the other cars they sell.



As noted above the car is $2000 cheaper if paid for in cash.


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## pwm (Jan 19, 2012)

M3S wrote: _Don't you have to fully insure a car you had to borrow money for in case it is totalled? You can't self insure. If you own the car outright, and can afford to total it and replace it in cash yourself, you will save a fortune over time._

I'm still not sure what you mean by that statement M3S. Here in Manitoba, you can't drive an uninsured vehicle. When you license it you have insurance. The license and insurance are one thing. The only way to reduce your cost is to go with minimum PL&PD and $500 deductible. Manitoba has govt run auto insurance called MPIC, (Manitoba Public Insurance Corp). Just curious; what province do you live in where you can drive an uninsured vehicle? (If you don't mind my asking.)


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## HaroldCrump (Jun 10, 2009)

PWM, I believe M3S means that if you own the vehicle outright, you only need to buy liability insurance coverage, and no need to buy full coverage or even collision coverage.


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## pwm (Jan 19, 2012)

That's not possible under MPIC. I guess that's one big difference between public and private auto insurance.


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## HaroldCrump (Jun 10, 2009)

pwm said:


> That's not possible under MPIC. I guess that's one big difference between public and private auto insurance.


Interesting...so MPIC requires everyone to carry comprehensive coverage at all times? Regardless of age/condition of car?


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## m3s (Apr 3, 2010)

pwm said:


> I'm still not sure what you mean by that statement M3S. Here in Manitoba, you can't drive an uninsured vehicle. When you license it you have insurance. The license and insurance are one thing. The only way to reduce your cost is to go with minimum PL&PD and $500 deductible. Manitoba has govt run auto insurance called MPIC, (Manitoba Public Insurance Corp). Just curious; what province do you live in where you can drive an uninsured vehicle? (If you don't mind my asking.)


I've lived in every province but I never did register a vehicle in MB (heard they are brutal for motorbikes though). In SK, SGI insurance only covered the mandatory ins and you had to get private insurance for full coverage IIRC. Quebec is somewhat the same (registration had build in insurance) The minimal PLPD and raised deductible is what I was referring to. If you finance a car (IE, someone else is loaning you that car) I understand they require you to fully insurance it. I certainly would if I was loaning you money for a car, just like a mortgage requires home insurance. If you total "their car" how else would they secure themselves a repayment?


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## pwm (Jan 19, 2012)

Yes. The basic collision deductible is $500 and liability is $200k. You pay more to reduce the deductible, and increase the liability. I keep the $500 deductible, but increase the liability to 2 million. They say the cost is better than private, but who know for sure.

I actually am very happy with MPIC. And that is quite a surprising statement coming from me, since I'm generally not a fan of government programs.


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