As a financial planner, I don’t believe in going into debt so I always buy used cars. In fact, I’ve never had a car payment. Last year I needed to purchase a “new-to-me” vehicle. When I started doing my research, though, I found that I would pay (at this time in the economic cycle) essentially the same price (over the life of the vehicle) for a used car as I would a new car. Ultimately, I decided to buy a NEW truck and I am sharing with you the math from my research in my quest to find the cheapest way to buy a new car.
Did I mention how much I hate debt? I mean, I absolutely hate going into personal debt. In fact, I’ve written a course on using debt strategically in your business, and I’ve also filmed a YouTube video about the money you can save by keeping a mortgage on your house. I realize that some debt can actually be “good,” but I’m not a fan of taking out loans on depreciating assets. Knowing the time would be soon, I have been setting back the equivalent of a car payment each month in my savings account. In fact, I was ready to purchase my new truck with cash.
Yet, I didn’t want to reduce my liquidity. I’ve been using my stash of cash to build wealth in other places. If I put a significant amount of my cash into my new car, I would lose my liquidity and my ability to invest in other assets. Whereas, if I kept the cash, I could always go in and pay off the vehicle if the market goes south or if something bad happens I would have access to cash. I also wanted to hold onto my cash because I believed the stock market was going to fall, and from October to December of 2018, it did. It was one of the first bear markets we’ve had in a while, so I didn’t want to get rid of my cash in August of 2018.
Additionally, right before I went to purchase my new truck, I recorded a podcast episode with a buddy, Clay McGee, the finance director of Rusty Wallace Kia. He mentioned that financing options might help me save my cash when I went to buy a new car. Intrigued, I headed to the Ford dealership to talk to their finance director.
RELATED PODCAST: An overview of the car buying experience from the Dealer’s perspective
When I got to the dealership, I thought for sure I wanted a 0% interest loan. I mean, who wouldn’t? No one wants to pay interest when they don’t have to. But I got to thinking. Why in the world would a bank loan money at 0% interest? That doesn’t make any sense. Why would a bank loan money without making money? There’s got to be a catch.
Well, according to the manager, the dealership had more vehicles than they needed in stock. To move overstocked trucks and to incentivize buyers to purchase that type of vehicle, Ford was offering 0% interest on select models. Okay. That makes sense, but they still have to make money, don’t they? How do they do that?
According to Clay, dealerships will offer buyers less money for their trade-ins or give them fewer rebates on the new vehicles to make their profit. Obviously, if they offer you less than your vehicle is worth, they can make more money on it when they resell it. Since I had already sold my Nissan Murano privately, I didn’t have a trade-in. Therefore, if I wanted to finance my new truck at 0% interest, I would have to pay close to MSRP for it.
My goal was to pay as little as possible for my truck, though. Sure, I didn’t want to pay high-interest rates, but I didn’t want to pay a higher price for the vehicle, either.
Convinced that there had to be a better option, I went back to the finance manager for help. According to him, if I was willing to finance my vehicle at an interest rate of 8.89%, Ford was offering me almost $12,000 in rebates. In other words, if I was willing to take a higher interest rate, I would get a much lower purchase price on my truck. Yet, when I heard 8.89% compared to 0%, my head did a somersault flip. This guy had to realize that 8.89% is more expensive than 0%, right? I get that I was saving $12,000 on the purchase price. But wouldn’t an 8.89% interest rate make the vehicle just as expensive to me as the other option was over the course of the loan?
Worried that I was getting a raw deal either way, I decided to run the numbers for myself. Here is what I discovered.
If I wanted to finance my truck at 0%, the purchase price would be $53,000, and my monthly payments would have been $883 on a five-year term. Now, this is assuming I wasn’t going to put any money down or do anything other than finance the entire cost of the new car.
However, if I had taken the 8.89% interest rate on the same term, the purchase price was discounted to $41,000. That would make my monthly payment $848.
If you annualize this out, I would pay a total of $53,000 on the 0% interest rate note. That’s the price of the truck, and I’m not paying any interest. Sure. But if I annualize the 8.89% note with the $41,000 purchase price, my total costs over the life of the loan would be $50,934. That’s more than $2,000 less! Maybe that is a better deal.
At this point, I went back to the finance manager and said, “Let me ask you a question. Instead of me paying the 8.89% interest rate, what if I just borrowed money from an outside lender? I know I have an excellent credit score, and I could qualify for a 1.5% or 1.9% interest rate through my bank.” To that, he replied, “That’s fine, Justin. If you want to borrow money from your lender, then the purchase price of the vehicle is $50,500.”
Did you notice what he did there? He eliminated a significant amount of the rebates. Ultimately, the purchase price was $2,500 less than the 0% interest rate option, but it wasn’t near the purchase price of the 8.89% interest rate option. Then, when I ran the rate with the five-year term, I found my monthly payments would be $882.
So here’s where it gets crazy to me. On a 0% interest rate, my payment would have been $883 a month. Had I used an outside lender, my payment would have been $882 a month, a $1 difference. And had I used the 8.89% interest rate, my payment would have been $848 a month.
Let’s look at all three options side-by-side, then. If you remember, my total costs over the lifetime of the 0% interest loan would be $53,000. The total costs over the lifetime of the 8.89% interest loan would be $50,934. And surprisingly, the total carrying costs for the loan at 1.9% would be $52,976.
So in reality, the interest rate AND the purchase price make a difference. How could I get the lowest purchase price AND the lowest interest rate? Which was the cheapest way to buy a new car?
Well, I’ll tell you what I did. I went out and bought my F150 truck, and I financed it through Ford Credit at an 8.89% interest rate. Yep, you heard me right. Yours truly financed a vehicle loan. I went out and bought a new vehicle and paid $41,000 for the truck with an 8.89% interest rate. Then after 30 days, I refinanced the note with AAA, my lender, with a balance of $41,800, an interest rate of 1.9%, and a five-year term. Ultimately, my annualized cost over the lifetime of the loan was $43,849.
Essentially, I “gamed the system.” I knew my budget, and I knew what kind of interest rates I could get because I knew my credit score. I ended up getting the $12,000 of dealer rebates off the purchase price of the vehicle, and I ended up saving more than if I had purchased the loan directly with a line of credit from AAA. Ultimately, I ended up paying almost $10,000 less than I would have if I had taken the 0% interest loan.
So in today’s marketplace, how can you get a new car cheaper? It may not the 0% interest rate, at least not by the numbers with which I was working. It’s not even going to the bank or credit union and borrowing 1.9% or whatever interest rate you can get. That’s clearly not the best deal. Clay gave me this idea in my podcast. I tested it, and he was right! The cheapest way to buy a new car, at least for me, was to take the maximum rebates with the highest interest rate and then refinance the loan through my local institution.
Stay with us in this Personal Finance for the Business Owner Series as we leave transportation and head over to lodging… specifically, how much you, the business owner, should spend on a house and how to pick a mortgage type.