You have only saved 2,000. You are going to trade in your old car and get a new one. The dealership has offered you 3,000 for your trade, and you have accepted their offer. The car you want to buy costs 23,000 but you talked them down to 21,000. The dealership is offering you the following offer 0 percent financing or 4,000 cash back. If you choose the cash back, use the 4,000 to lower the amount you will finance. The interest rate on a 5 year car loan is 8 percent. Which is a better deal the 0 percent or the cash back, and by how much?
To determine which offer is a better deal, let's break down the information and calculate the cost of each option.
Your savings: $2,000
Trade-in value: $3,000
Cost of the car before negotiations: $23,000
Negotiated cost of the car: $21,000
Now let's calculate the cost if you choose the 0 percent financing option:
Amount to finance with 0 percent financing:
($21,000 - $4,000) = $17,000
Interest rate on the 5-year car loan: 8 percent
To calculate the cost of financing with 0 percent interest, we need to find the total interest paid over the loan term:
Total interest = (Amount financed) x (Interest rate) x (Loan term)
Total interest = $17,000 x 8% x 5 years = $6,800
Therefore, if you choose the 0 percent financing option, the total cost would be:
Total cost with 0 percent financing = $21,000 + $6,800 = $27,800
Now, let's calculate the cost if you choose the $4,000 cash back option:
Since you will be using the $4,000 cash back to lower the amount financed, the new amount financed becomes:
$21,000 - $4,000 = $17,000
Interest rate on the 5-year car loan: 8 percent.
Total interest = $17,000 x 8% x 5 years = $6,800
However, since you received $4,000 cash back, we need to subtract this amount from the total cost:
Total cost with cash back = ($21,000 - $4,000) + $6,800 = $23,800
Comparing the two options, we can see that the cash back offer is a better deal because it results in a lower total cost. By choosing the cash back option, you would save:
$27,800 - $23,800 = $4,000
Therefore, the cash back offer is better by $4,000 compared to the 0 percent financing option.