Choosing the best credit deal

As a general rule, most experienced consumers know that the way to spend the LEAST possible amount of money when borrowing is to:
1) find the lowest interest rate
2) borrow as little as possible
3) borrow for as short a time as possible (pay debt off quickly)

In some situations, those three principles are sufficient to making wise borrowing decisions. In other cases, however, it gets trickier. Take the following example:

Suppose you have decided to purchase a new vehicle for $25,000. You have two financing options:
A - receive $1500 cash back now, and finance the purchase @ 2.9% for 48 months OR
B - $0 cash back, and financing @ 0.9% for 36 months

Can you tell which is the better deal? Here's how it works out.

Option A -
Your monthly payment will be $552.25
Over the course of the loan, you will pay a total of $26,508. BUT when you subtract the $1500 cash back, your net cost is $25,008
(note: if you applied the $1500 to the purchase price,
then your total cost would be even lower).

Option B -
Your monthly payment will be $704.12/month
Over the course of the loan, your total payment will be $25,348

In this case, Option A is ultimately cheaper. But the average person really can't figure that out in their head, or even with an ordinary calculator, when just the basic details are given. Don't be rushed into a quick decision.
*** The Moral of the Story: you need to see the bottom line in order to make wise borrowing decisions.

Consumer Reports has created an on-line calculator that will help you evaluate vehicle purchases when you have options for incentives and/or special financing. Go to www.ConsumerReports.org and search for "car buying calculators."

The Take Control of Your Money web course: www.extension.iastate.edu/financial/money

Source:
Barb Wollan
ISU Extension Family Resource Management Specialist