What is the Value of 0% Financing?

The use of 0% purchase financing across the automotive industry in recent years as a purchase incentive to buyers has now become so commonplace that we frequently find shoppers treating it as a basic entry point.  The true value of this incentive has started to lose its lustre with over use.  The truth is that this form of incentive has a significant value far greater than free iPods or similar gimmicks.

In most 0% financing offers, there is the alternative to waive the low financing in favour of a discount for cash purchase.  With some brands, including Mazda, you can opt for the cash discount and still finance the purchase at the preferred rate that Mazda has negotiated with the bank.  For example, in Canada, you can currently purchase a 2011 Mazda3 and finance the vehicle over 60 months at 0% OR you can get a cash discount of $1,000 and finance it at a fixed rate of 5.25%.  Which would you choose? 

First, we need to compare the cost of the 0% financing to the cost of paying cash and financing at the best available rate.  Here is how the analysis looks on the 2011 Mazda3 mentioned above:

Mazda3 Options              0% Financing    Cash with 5.25%
Mazda3 MSRP                        $19,390         $19,390
Freight, PDI, Fees                    $  1,604         $  1,604
Mfgr. Discount for Cash           $         0          ($1,000)
Cost of the Car                        $20,994         $19,994
HST at 13%                            $   2,729        $  2,599
Amount to Finance                   $23,723         $22,593
Cost of Financing                     $         0         $  3,144
Total Amount Paid                   $23,723         $25,737
Savings @ 0% Finance         $  2,014

So, compared to the next best alternative, the 0% financing for 60 months saves you over $2,000.  This is a substantial discount on a very popular, competitively priced compact car (especially when you consider that the dealer doesn't make nearly that much in selling this car).