Losing Money At Zero Percent

One thing that can drive students crazy when first learning Finance is that sometimes things seem counterintuitive. For example, a recent article highlights that while a zero percent interest rate on car loans seems like a good deal, it can actually cost the uninformed buyer money. One specific example is the 2015 Jeep Cherokee SUV.  The vehicle lists for $27,153, but the buyer can take a $2,000 rebate or zero percent financing for 60 months. While many people would jump at the zero percent financing, the monthly payment under this option would be $452.55. If the buyer takes the rebate instead and finances the vehicle at 2 percent, the monthly payments would only be $440.88 per month. Although the article does not discuss a breakeven interest rate, we hope your time value of money skills allow you to calculate that the breakeven rate is 3.10 percent. So, if you can borrow at any rate below 3.10 percent for 60 months, the $2,000 rebate is preferable to zero percent financing!