Line of Credit VS 0 APR for New Auto

Over the long term, what has the greater savings.

1. Using a 0 APR for 3 years on a new auto of $20,000

or

2. Using Line of Credit at 5% over 4 years on a used auto of $13,000. The used auto would have milage less than 25K


While the 0 apr looks good, you also suffer the first year depriciation of 5,000 dollars on the new vehicle.

Is deducting the interest from the Line of Credit greater than the 0% apr in dollars savings.

I guess I'm trying too see what I gain with the 0%apr versus using a Line of Credit that is tax deductable...

Okay, for starters you haven't dealt me a full hand. So I can't make an accurate assessment. For example, you haven't told me what cars you're looking at. That's critical when valuing this transaction.

Anyway, let's play with the numbers and see what we get. To keep it simple, I'll overlook the time value of money.

If you're dealing with true zero percent financing on a $20,000 car assume your payments over 48 months or four years are $416.67 a month. Simple arithmetic: $20,000 divided into 48 equal parts.

Taking a $13,000 used car and financing it at 5% a year works out to a total cost--interest plus principal--of $14,370.28. Spread over four years your payout would be $299.38 a month-considerably lower.

So in real terms you're paying over $400 a month for the new car and about $300 for the used automobile. Out of pocket costs: That's a savings of about $5,630 over four years.

Assuming your line of credit is a home equity loan, the 5% interest is more like 3.35% if you are taxed at a 33% rate. In that case, the $13,000 car is actually costing you $289.76 a month or a total of $13,908.56 over four years. So now the used car is costing you $6,091 less--not just $5,630 less. In other words, you're saving $1,291 more.

That's the mathematics. And, from a purely dollars and cents point of view the $13,000 car has far less impact on your pocketbook than the new car, even with its zero percent financing.

But what are you getting? If the two cars in question are a 2001 new Camry versus a 1998 Camry, I could make a great case for buying the used car, assuming the vehicle had been kept well and is in good condition. On the other hand, you'd get unequal value from a used 2000 Mazda Prot?g?. With 25,000 miles on such a vehicle it would have been run into the ground.

It's complicated, but I hope that sheds some light on the subject.