How to determine your savings for 0% APR Loans
With all the Low APR deals, I thought it might be time to review how much does 0% APR save you and is it worth worse gas mileage.
Lets take a look at Ford’s offer of 0% APR for 72 months on 2008 F150’s. To determine what this means in savings all you have to do is determine how much interest you would have paid over a similar term under normal circumstances. For a 72 month loan, your normal APR would be somewhere between 6-8% for average credit, lets call it 7%.
To determine the total interest, you can use excel and calculate your own formulas, or simply visit this handy tool from Bankrate and enter your information and then view the Amortization schedule. Scroll to the very bottom and in the last month you will see the total interest paid.
So try this, assume 7% for 72-months on $25,000 (as that seems to be the mid-level price after discounts on the F-150).
With the 0% APR, your interest expense is $0.
With 7% APR your interest expense is $5,688.21.
There you have it, the 0% financing saves you $5,688.21 Vs. a loan for the same period at 7% interest. However, since most people do not get a 72-month loan, it is more accurate to compare the offer against the normal loan you would get. If, for instance, you normally buy cars on 48-month loans, than just use the lower number for your comparison. The savings goes down for ever year you decrease the time you would have normally bought the car. You should also adjust the interest to what you think you could qualify for.
Other compares you can do!
0% APR can be great offers, but remember, if you are looking to save money due to gas then make sure to compare the total cost of the car over the time you plan to own it including fuel costs. Many of the really good offers are on trucks or less fuel efficient cars. On the surface, they may look like the better route, but with fuel cost so high you will quickly lose those savings.
In the example above, the Ford F-150 would cost $4,421.53 in fuel base on $4.79 per gallon gas and 12K miles per year. A more fuel efficient car could save you 50% or more on that cost. Over a six year time, a car that cost 50% less fuel will save you $13K. This may be enough to justify a more expensive hybrid truck or a hybrid SUV if you need the large car. If you don’t need the large car, then you better be saving at least $13K off your deal before you take the truck over a more fuel efficient car. Keep in mind this savings assumes fuel will remain constant and that you only drive 12K miles per year. Adjust anyone of those numbers and you will get different results.
Point is, before you rush to buy a car based on the desperate measures automakers are taking, do the math to see if makes sense on the model you are looking at. If savings is your goal, you have to factor in fuel costs before you can make a good choice.
Steps to compare total cost:
1. Start with the price you will pay for the car after rebates and incentives.
2. Determine the interest expense on the loan you will be going for using the tool above from bankrate.
3. Determine the number of miles you drive per year and divide that by the average MPG of the car. Multiply the number by the gas cost in your area. Now you have the yearly fuel cost.
4. Multiply the yearly fuel cost in step 3 by the number of years you plan to keep the car. (must be the same for each car you are comparing).
5. Add the results from 1, 2, 4 to arrive to your estimated total cost of the car (this excludes maintenance, registrations, and other factors assumed to be the same for all cars in your comparison. If you are comparing a BMW to a Civic, you will have to adjust these numbers as a BMW has more expensive ownership costs).
That is it, this will give you an idea of what car is less expensive when you factor in fuel, rebates, and special financing.