Are low interest rates really a good deal??

Are low interest rates really a good deal?

How much do I really save?

I am sure everyone has asked these questions.

Back in the 1980’s, interest rates reached an all time high for automobile financing.
Banks were capped at 12% APR for part of that time, and it became next to impossible to get loans approved for customers as the prime rate, or cost of money, was over 20%.
General Motors pioneered the idea of what we now call sub vented rates. The manufacturer actually pays to the lender the difference in the special rate and the rate they would normally charge. In other words, they are taking the cash incentive and giving it to the lender to make up the difference in money costs.
In the mid 80’s, General Motors offered 3.9% Apr in lieu of close out incentives that they had given in the past. They believed that customer weren’t buying because the interest rates were too high. It was an instant success. General Motors had a record close out sale for that year. Manufacturers have adopted that philosophy to help sell more vehicles industry wide.
Presently, Honda is offering 0.9 % APR financing for up to 60 months with approved credit on its most popular models.
The Civic, the Accord, the Crosstour, the Ridgeline, the Fit, and the Insight all have 0.9% APR with approved credit. The CR-V, the 2011 Pilot, Odyssey, and Element all have 1.9% APR for up to 36 months and 2.9% APR for up to 60 months available with approved credit. They are offered in lieu of any cash incentives that may be available.
In other words, you either get the special rate or additional discounts on the car.

Let’s look at few situations and see what that would mean to you, the consumer. In other words, what’s in it for me, or WIIFM.

You have decided on a new vehicle and have got the dealer to agree to accept an offer of $25,000. Honda is offering 0.9 % for up to 60 months or $1200 cash to the dealer that he will pass on to you. If you choose the special rate, the payment would be $426. That means for the 60 months of the loan you would pay back $25,560 or just $560 interest.

One of the things to consider is that a dealership arranges a lot of financing on a monthly basis. As a result, we are generally able to get a bank to agree to a lower rate than an individual can get them to do. The volume of business coming in from a dealer means continued growth and new customers for the bank.

Let’s assume that we were able to find a bank that would offer 3.9% for 60 months. After deducting the cash incentive of $1200, your price would be $23,800. Your payments would be $437 for the 60 month period for a total of $26,220. Your interest would be $2420 for the 60 months. Therefore, you would be paying $1200 less for the car, but $660 more in total payments over the period of the loan. Obviously, the higher the price of the vehicle, the more you would save over all.

Let’s look at a less expensive car and see what the numbers come out to on it.
You are buying a car for $15,000. You have the choice of either $1000 in additional discount or 0.9 for 60 months. Financing $15,000 at 0.9% APR your payments would be around $256; that means you would be paying back $15,360 over the period of the loan and paying a total of $360 in interest charges.
Let’s do the same thing but this time take the $1000 cash incentive. That means your price would be $14,000. One of our banks is offering 3.9% APR for 60 months. Your payment would be $257 or $15,420 over the period of the loan. So the 0.9% Apr is still the better deal money wise on that amount.
The one variable that should be considered is how long you will keep the vehicle. In today’s market, people want to trade for a new vehicle after 3 yrs. If you trade then, your payoff will be higher if you took the financing rather than the cash. You would have been better served long term to have taken the dealer cash up front.

The dealership finance manager will always be willing to go over all of your options with you to insure that you get the best option possible for your circumstances.

If you have any questions, just email us at larrydavis@mosesautonet.com or simply comment on our blog.
Until next time, have a happy Honda day.
Larry