Car Buying Methods and Costs Research Proposal

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This does not compare favorably to the near-half value of the trade in with a cash purchase.

A purchase financed through a bank or other lender will be treated by the dealership as a cash purchase, and the car can be obtained for the same price. Assuming a standard down payment of ten percent ($1,600) and an interest rate of 3.5% (.25% above prime) over 36 months, the total cost of the car would be $17,590, including sales tax. Monthly payments would come to $421.95. Investing the principal of $16,000 in the same CD, less the annual costs of payments, would not have a positive balance at the end of three years -- the initial outlay is too great to be overcome by the interest rate that is only 1% higher than that of the loan payments. This would allow the company to absorb the cost of the car at a slower pace, and retains the same trade-in value as the cash purchase, but over a three-year loan the cost is still higher.

Financing through a dealership is not always advisable, but in the current climate nearly every manufacturer is offering zero down and zero APR for the first year for many qualified buyers. The purchase price of the vehicle will jump back up to the $18,000 range for a non-cash purchase, however, and interest will be applied to the second and third years of the loan. Interest rates are likely to go up, but for the purposes of this analysis we will assume that the loan is charged a rate of 4% in the second and third years (though it will likely be higher).

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The total cost of the car, then, would be approximately $19,300 with sales tax. The CD investment would yield a final balance of $350 after three years, not nearly enough to offset the additional costs of financing the care even at the better rate -- the higher cost of the non-cash purchase eliminates any benefits that might have been obtained through the lower outlay of initial capital.

The cash option, then, seems to be the best available. Financing through a bank does allow for a one percent growth rate (4.5% return on the CD less 3.5% on the payments), but with interests rates likely to increase in the near future I would still recommend the cash option. The entire CD would be consumed by the actual purchase price of the car, anyway; though the company could earn a little money towards the car via investments it would only slow the rate of payment, and would not yield any significant gains. The scenario might be different for a car at a different price, but given the Civic's expected….....

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