0% financing vs. cash incentives – which is better?

zero percentIf you’re in the market for a new car, chances are you’ve noticed promotions within ads offering motivators like 0% financing or cash purchase incentives. The key word in the ads is often the word “or” – e.g. “0% financing or cash purchase incentive”. This means you can only have one or the other. And if you’re going to maximize your available savings, you need to know how to analyze the best option to pursue as it might not be as clear cut as it seems.

Let’s quickly cover the basics. 0% financing is, in theory, free money as you can finance your vehicle purchase with no cost for borrowing the money. However, like communism, what’s good in theory isn’t always good in practice – as is sometimes the case with 0% financing. If there’s a “cash purchase incentive” being offered in lieu of 0% financing, then the financing isn’t really free, is it? You’re foregoing the cash purchase discount by financing, thus making the cost of borrowing not 0%, but the amount of the cash incentive. Misleading? I think so, and I really believe manufacturers should be prohibited from this kind of misleading advertising. But I digress…

In order to decide whether taking 0% financing or the cash incentive is best for you, you need to know what interest rate you can attain from your financial institution for an automotive loan, as the dealership will — perhaps surprisingly — regard this as a cash purchase as they’re being handed a cheque from your lender. So with financing from your own bank rather than the auto manufacturer’s financial services arm you can cash in on the “cash purchase discount/incentive”, even though you are in fact financing your vehicle purchase. And in some cases, paying your lender an annual interest rate of roughly 5% can work out to a lower monthly payment by capitalizing on the cash incentive instead of the “0%” financing (which we now know isn’t really free if there’s an alternative cash incentive at play). So do your homework. Call you bank to find out your interest rate on an auto loan. Then use an online financing calculator to determine whether it’s cheaper to borrow from your bank or the manufacturer’s financial services arm at “0%”. You might just be surprised at how much money a tiny bit of research can save you!

Angus McComb


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