Weighing Labor Day Car Loans

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Labor Day weekend is traditionally considered a great time to shop for a new car or truck, as dealers cut prices to clear lots for new-year models. This year, some car makers are offering an enticing combination of 0% financing and cash back. Other times, it’s often one or the other.

Ford (Stock Quote: F), for instance, will give you $1,000 toward a 2010 F-150 pickup, plus 0% financing for 36 months. Or you can take a 48-month loan at 3.9%, 60 months at 4.9% or 72 months at 6.9%.

Some of the options are pretty appealing, given that new-car loans for 36 to 60 months all average more than 5%, according to the BankingMyWay.com survey.

But wait, there’s more: Pay cash and Ford will give you a variety of incentives totaling $3,500.

Which one is the best deal? Trying to figure it out can make your head spin.

As a rule of thumb it’s best not to pay interest if you can avoid it, though that’s not necessarily the case when interest rates are very low. You’d be better off paying 3.9% on a car loan, rather than paying cash, for instance, if your cash could earn more than 3.9% in savings or an investment.

But right now there aren’t any surefire ways to earn more than 3.9% without taking on a good deal of risk. The average 48-month certificate of deposit pays only about 1.5%. So you’re better off not paying interest, which means paying cash or taking the no-interest loan.

But those options have shortcomings, too. It’s hard to come up with tens of thousands of dollars for a cash deal, and borrowing for 36 months rather than 48, 60 or 72 means shouldering a bigger payment. A $30,000, no-interest loan would cost $833 a month, compared to $565 on a 60-month loan at 4.9%, for example.

Total interest: $3,390 on the 60-month deal versus nothing on the 36-month loan. That’s real money, sure, but not so bad spread over five years. When rates are very low, interest cost is a smaller consideration, even if you’d really rather pay no interest at all.

One more thing to think about: If you sell the vehicle in a few years while the loan is still running, how much would you still owe? The longer the term and higher the rate, the more you’ll owe when you decide to sell the car.

There are many factors to consider, and those Labor Day deals won’t last long. Use the Auto Loan Calculator to check monthly payments at various rates and terms, then use the Auto Rebate vs. Low Interest Financing Calculator to see which combination of rebates and rates would work best for you.

—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.

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