Today's Morning Shift reported that Chevrolet and Ford are offering unprecedented 72 month loans with zero interest. But is carrying a loan for this amount of time even if the money is "free" a good move?
For the longest time the most popular loan was the 5 year or 60 month term, as this gave most car buyers the ability to keep their monthly payments reasonable without paying an excessive amount of interest. Most financial gurus have advised against carrying car notes beyond 5 years, but why is that?
The primary reason is the extra interest you are going to pay by extending the loan another year. However, given that interest rates are currently pretty low, how much more will you really pay?
The average APR for a new car loan is about 3.5%. Here are the payments and interest for a $25,000 car loan for 60 months at 3.5%:
Here is a $25,000 car loan for 72 months at 3.5%:
On the 72 month loan you are going to pay an extra $466 in interest, but you will have an extra $70 bucks in your pocket each month. Let's say for the sake of argument that you have to pay a little more interest for that longer loan, maybe 5%:
In this case you are going to pay an extra $1,700 in interest, so that is probably not worth it.
But what if you can get no interest for 72 months?. That changes the game. Especially if we look at this in relation to the recent Car Wars showdown between the Fiat 500 Abarth and the Fiesta ST.
Many argued, myself included, that while both cars are a hoot to drive the Abarth can be had with some serious discounts which made it a "better value." However, if you can score the ST at 0%, the value proposition tips in favor of the Ford.
Starting MSRP of a Fiesta ST is about $21,000 (The calculator would not let me use 0%, but I could do 0.01% so that is close enough).
It would not be difficult to find a Abarth for around $18,500. Now most people will finance that 18,500 for 5 years:
Even though the "sale price" of the Fiat is cheaper, but due to the interest the Ford is cheaper per month at $291/mo vs $336/mo for the Abarth. Now what if you financed that Fiat for 6 years at 3.5%:
In this case the Abarth has a cheaper than the ST but only by about $7. I think most of us would agree that the ST is probably worth the extra $7 per month.
The take away from all this math is, if you are in the market for an affordable hot hatch, you should go get a Fiesta ST and hopefully get approved for that zero interest, 72 month financing.
(Photo Credit: Ford.com)
If you have a question, a tip, or something you would like to to share about car-buying, drop me a line at AutomatchConsulting@gmail.com and be sure to include your Kinja handle.
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