Why would a car company lend me money at a very low interest rate?
Because the federal government won't use the money to buy a car thus generating profits for the car company. The aim of cheap loans is to drive sales of cars. The difference between the amount of interest paid on the loan, and the amount they could have got by investing it elsewhere, is simply a reduction in the profit. This is true whatever the actual interest rates are. "This is ""incentive financing"". Simply put, the car company isn't in the business of making money by buying government bonds. They're in the business of making money by selling cars. If you are ""qualified"" from a credit standpoint, and want to buy a $20k car on any given Sunday, you'll typically be offered a loan of between 6% and 9%. Let's say this loan is for three years and you can offer $4000 down payment and/or trade. The required monthly payment on the remaining $16k at the high end of 9% is $508.80, which over 3 years means you'll pay $2,316.64 in interest. Now, that may sound like a good chunk of change, and for the ordinary individual, it is, possibly enough that you decide not to buy today. Now, let's say, all other things being equal, that the company is offering 0.9% incentive financing. Same price, same down payment, same loan term. Your payments over 3 years decrease to $450.64, and over the same loan term you would only pay $222.97 in interest. You save over $2,093.67 in interest over three years, which for you is again a decent chunk of change. Theoretically, the car company's losing that same $2,093.67 in interest by offering this deal, and depending on how it's getting the money it lends you (most financial companies are middlemen, getting money from bond-buying investors who expect a rate of return), that could be a real loss and not just opportunity cost. But, that incentive got you to walk in their door, and not their competitor's. It helped convince you to buy the $20,000 car. The gross margin on that car (price minus direct costs) is typically 20% for the dealer, plus another 20% for the manufacturer, so by giving up the $2,000 on the financing side, the dealer and manufacturer just earned themselves 4 times that much. On top of that, by buying that car, you're committing to buy the parts for the car, a side business with even higher margins, of which the car company gets a pretty big chunk. You may even be required to use dealer service while the car's under warranty in order to keep the warranty valid, another cha-ching. When you get right down to it, the loss from the incentive financing is drowned in the gross profits they make from selling the car to you. Now, in reality, it's a fine balance. The percentages I mentioned are gross margins (EBITDASG&A - Earnings Before Interest, Taxes, Depreciation, Amortization, Sales, General and Administrative costs; basically, just revenue minus direct cost of goods sold). Add in all these side costs and you get a net margin of only about 3.5% of revenue, so your $20k car purchase may only make the car company's stakeholders $700 on the sale, plus slightly higher net margins on parts and service over the life of the car. Because incentive financing is typically only offered through the company's own financing subsidiary, the loss isn't in the form of a cost paid, but simply a revenue not realized, but it can still move a car company from net positive to net negative earnings if the program is too successful. This is why not everyone does it, and not all at the same time; if you're selling enough cars without it, why give away money?  Typically, these incentives are offered for two reasons; to clear out old cars or excess inventory, or to maintain ground against a competitor's stronger sales numbers. Keeping cars on a lot ready to sell is expensive, and so is not having your brand driving around on the street turning heads and imprinting their name on the minds of potential customers." "Here I thought I would not ever answer a question on this site and boom first ten minutes.  First and foremost I am in the automotive industry, specifically one of our core competencies is finance department management consulting and the sales process both for the sale of the care as well  as  the financial transaction. First and foremost new vehicle gross profits are nowhere near 20% for the dealership.  In an entry level vehicle like say a Toyota Corolla there is only a  few hundreds of dollars in markup from invoice to M.S.R.P.  There is also something called holdback that dealers get for achieving certain goals such as sales volume. These are usually pretty easy to hit. As a matter of fact I have never heard of a dealer not getting the hold back on a deal.  This hold back is there to cover overhead for the car, the cost of getting it ready to sell, having a lot to park it on, making it ready for delivery, offset some of the cost of sales labor  etc.  Most dealerships consider the holdback portion of the invoice to not be part of the deal when it comes to  negotiations.  Certain brands such as KIA and Chrysler have something called ""Dealer Cash"" these payouts are usually stair stepped according to volume and vary by dealer, location, past history, how the guys at the factory feel that day and any number of combinations.  Then there is CSI or Customer Service Index payments, these payments are usually made every 1/4 are on the Parts Statement not the Sales Doc and while they effect the dealers bottom line they almost never affect the sales managers or sales persons payroll so they are not considered a part of the cost of the car.  They are however extremely important to  the dealer and this is  why after you have your new car they want you to bring in your survey for a free oil change or something.  IF you are going to give a bad survey they want to throw it away and not send it in, if you are going to give a good survey they want to  make sure you fill it out correctly.  This is because lets say they ask you on a scale of 1-10 how was your sales person and you put a 9 that is a failing score. Dumb I know but that is how every factory CSI score system I have seen worked.  According to NADA the average New Vehicle gross profit including hold back and dealer cash is around $1000.00.  No where near 20%.  Dealerships would love it if they made 20% on your new F250 Supercrew Diesel at around $50,000.00.  One last thing there is something on the invoice called Wholesale Finance Reserve.  This is the amount of money the factory forwards to the Dealership to offset the cost of financing vehicle on the floor plan so they can have it for you to look at before you buy.  This is usually equal to around 3 months of interest and while you might buy a vehicle that has been on the lot for 2 days they have plenty that have been there much longer so this equals out in a fair to middling run store. General Mangers that know what they are doing can make this really pad their net profit to statement. On to incentives, there are basically 3 kinds.  Cash to customer in the form of rebates, Dealer Cash in the form of incentives to dealerships based on volume or the undesirability of a vehicle, and incentive rates or Subvented leases.  The rates are pretty self explanatory as they advertised as such (example 0% for 60 Months).  Subvented Leased are harder to figure out and usually not disclosed as they are hard to explain and also a source of increased profit.  Subvented leases are usually powered by lower cost of money called a money factor (think of it as an interest rate) that is discounted from the lease company or a subsidized residual.  Subsidized residuals are virtually verboten on domestic vehicles due to their poor resell values.  A subsidized residual works like this, you buy a Toyota Camry and the ALG (automotive lease guide) says it has a residual at 36 months of 48%.  Well Toyota Motor Credit says we will give you a subvented residual of 60% basically subsidizing a 2% increase in residual.  Since they do not expect to be able to sell the car at auction for that amount they have to set aside the 2% as a future expense.  What does this mean to you, it means a lower payment.  Also a good rule of thumb if you are told a money factor by your salesperson to figure out what the interest rate is just multiply it by 2400.  So if a money factor is give of .00345 you know your actual interest rate is a little bit lower than 8.28% (illustration purposes only money factors are much lower than that right now). So how does this save you money well a lease is basically calculated by multiplying the MSRP by the residual and then subtracting that amount from the ""Capitalized Cost"" which is the Price paid for the car - trade in + payoff + TT&L-Rebate-Down Payment.  That is the depreciation.  Then you divide that number by the term of the loan and you have the depreciation amount.  So if you have 20K CC and 10K R your D = 10K / 36 = 277 monthly payment.  For the rest of the monthly payment you add (I think been a long time since I did this with out a computer) the Residual plus the CC for $30,000 * MF of .00345 = 107 for a total payment of 404 ish.  This is not completely accurate but you can use it to  make sure a salesperson/finance person is not trying to do one thing and  say another as so often happens on leases. 0% how the  heck do  they make money at that, well its simple.  First in 2008 the Fed made all the ""Captive"" lenders into actual banks instead of whatever they were before.  So now they have access to the Fed's discounting window which with todays monetary policies make it almost free money.  In the past these lenders had to go through all kinds of hoops to raise funds and  securitize loans even for super prime credit.  Those days are essentially over.  Now they get their short term money just like Bank of America does.  Eventually they still bundle these loans and sell them.  So in the short term YOU pay for the 0% by giving up part or all of your rebate.  This is really important DO NOT GIVE up your rebate for 0% unless it makes sense to do so.  When you can get the money at 2.5% and get a $7000.00 rebate (customer cash) on that F250 or 0% take the cash.  First of all make the finance guy/gal show you the the difference in total cost they can do do this using the federal truth in lending disclosures on a finance contract.  Secondly how long will you keep the vehicle?  If you come out ahead by say $1500 by taking the lower rate but you usually trade out every three years this is not going to work.  Also and this is important if you are involved in a situation with a total loss like a stolen car or even worse a bad wreck before the breakeven point you lose that price break.  Finally on judging what is right for you, just know that future value of the vehicle on for resell or trade-in will take into effect all of these past rebates and value the car accordingly.  So if a vehicle depreciates 20% a year for the first 3 years the starting point will essentially be $7000.00 less than you actually paid,  using rough numbers. How does this help the dealers and car companies?  Well while a dealer struggles to make money on new cars the factory makes all of their money on the  new cars and the new car financing.  While your individual loan might lose money that money is offset by the loss of rebate and I think Ford does actually pay Ford Motor Credit Company the difference in the rate.  The most important thing is what happens later FMCC now has 2500 loans with people with perfect credit.  They can now use those loans to budle with people with not so perfect credit that they financed at 12%-18% and buy that money with interest rates in the 2%-3% range.  Well that is a hell of a lot of profit.  'How does it help the dealership, well the more super prime credit they have in their portfolio the more subprime credit the banks will buy for them.  This means they have more loans originated that are more profitable for them.  Say you come in for the 0% but have 590 credit score, they get FMCC to buy the deal because they have a good portfolio and you win because the dealer gets to buy the money at say 9% and sell it to you at say 12% making the spread.  You win there because you actually qualified for a rate of around 18% with a subprime company like Santander or Capital One (yes that capital one) so  you save a ton on your overall cost of the car. Any dealership that is half way well run makes as much or money in the finance and insurance office than the rest of the dealership.  When you factor in what a good F&I Director can do to get deals done with favorable terms that really goes up.  Think about that the guys sitting a desk drinking coffee making more than the  service department guys all put together. Well that was long winded but there I broke down the car business for whoever read this far." In addition to the other answers, also consider this: Federal bond interest rates are nowhere near the rates you mentioned for short term bonds. They are less than 1% unless you're talking about terms of 5-10 years, and the rates you mentioned are for 10 to 30-years terms. Dealer financed car loans are usually 2-5 years (the shorter the term - the lower the rate). In addition, as said by others, you pay more than just the interest if you take a car loan from the dealer directly. But your question is also valid for banks. "They aren't actually. It appears to be a low interest rate, but it doesn't cover their true cost of capital. It is a sales tactic where they are raising the sticker price/principal of the car, which is subsidizing the true cost of the loan, likely 4% or higher. It would be hard to believe that the true cost of a car loan would be less than for a mortgage, as with a mortgage the bank can reclaim an asset that tends to rise in value, compared to a used car, which will have fallen in value. This is one reason why you can generally get a better price with cash, because there is a margin built in, in addition to the fact that with cash they get all their profit today versus a discount of future cash flows from a loan by dealing with a bank or other lending company. So if you could see the entire transaction from the ""inside"", the car company would not actually be making money. The government rate is also so low that it often barely covers inflation, much less operating costs and profit. This is why any time you see ""0% Financing!"", it is generally a sales tactic designed to get your attention. A company cannot actually acquire capital at 0% to lend to you at 0%, because even if the nominal interest rate were 0%, there is an opportunity cost, as you have observed. A portion of the sticker price is covering the real cost, and subsidizing the monthly payment." The car company loans you money at 1 or 2% because it is part of the incentive to get you to buy the car.  Car company transactions are complex involving the manufacturer, the dealership, and the financing part of the car company. Not to mention Rebates, the used car transaction, and the leasing department. If they don't offer you a loan then the profit from that part of transaction is lost to an outside company. The better loan rates from the manufacturer are only with shorter term loans and without the rebate. That is why some suggest that you get the rebate, and then go to a credit union for the loan for lowest overall cost and greatest flexibility. The advertised rates are also only for the customers with great credit scores and the room in their clash flow to pay off the loan in a year or two. If you don't fit in that category, the rates will be higher.
"If I were you I would pay off these loans today. Here are the reasons why I would do this: Car Loan For car loans in particular, it's much better to not pay interest on a loan since cars lose value over time. So the longer you hold the debt, the more you end up paying in interest as the car continues to lose value. This is really the opposite of what you want to do in order to build wealth, which is to acquire assets that gain value over time.  I would also recommend that once you pay the loan, that you set aside the payment you used to make on the loan as savings for your next car. That way, you will be able to pay cash for your next car, avoiding thousands of dollars of interest. You will also be able to negotiate a better price by paying cash. Just by doing this you will be able to either afford to buy a nicer car with the same amount of money, or to put the extra money toward something else. Student Loan For the student loan, 3% is a very low rate historically. However, the reason I would still pay these off is that the ""return"" you are getting by doing so is completely risk free. You can't often get this type of return from a risk-free investment instrument, and putting money in the stock market carries risk. So to me, this is an ""easy"" way to get a guaranteed return on your money. The only reason I might not pay this down immediately is if you have any other debt at a rate higher than 3%. General Reasons to Get out of Debt Overall, one of the basic functions of lifetime financial planning is to convert income into assets that produce cash flow. This is the reason that you save for retirement and a house, so that when your income ends when you're older these assets will produce cash, or in the case of the house, that you will no longer have to make rent payments. Similarly, paying off these debts creates cash flow, as you no longer have to make these payments. It also reduces your overall financial risk, as you'd need less money to live on if you lost your job or had a similar emergency (you can probably reduce your emergency fund a bit too). Discharging these loans will also improve your debt-to-income ratio if you are thinking of buying a house soon. I wonder whether as someone who's responsible with money, the prospect of cutting two large checks feels like ""big spending"" to you, even though it's really a prudent thing to do and will save you money. However, if you do pay these off, I don't think you'll regret it." I'm going to make an educated guess on #1. Money markets invest in bonds with a very short time to maturity. An MMA at a bank will be invested in government bonds. Yields on these bonds are really low right now. Thus the yield on that MMA is going to be pretty low. When you make a deposit in a savings account, the bank uses some of that money to lend back out to its customers in the form of car loans, mortgages, etc. These rates are higher, so the bank is willing to pay you a bit more than the yield MMA so they can use your money for these loans. For #2, your time window is short, so there aren't really a lot of options for you. Keeping your money where it is will actually cost you money in fees. You can do as I suggested in my comment above: close the current savings account that's hitting you with fees and open a (free) high yield savings account. You might get 1.1%. If you average $60k in the account over the next 6 months you'll earn $200-250 after taxes. You didn't ask about CDs, but lately shorter term CDs are paying less than savings accounts. Going out to a year will get you just above the rate on a high yield savings account; two years just a little more. These are outside your goal window, so they aren't an option for you. Generally speaking personal loans have higher rates than car loans.  During fairly recent times, the market for car loans has become very competitive.  A local credit union offers loans as low as 1.99% which is about half the prevailing mortgage rate.  In comparison personal loans are typically in the 10-14% range.   Even if it made mathematical sense to do so, I doubt any bank would give you a personal loan secured by a car rather than car loan.  Either the brain would not work that way; or, it would simply be against company policy. These questions always interest me, why the desire to maximize credit score?  There is no correlation between credit score and wealth.  There is no reward for anything beyond a sufficiently high score to obtain the lowest rates which is attained by simply paying one's bills on time.  One will always be limited by income when the amount able to borrow is calculated regardless of score.   I can understand wanting to maximize different aspects of personal finance such as income or investment return percentage, etc..  By why credit score?  This is further complicated by a evolving algorithm.  Attempts to game the score today, may not work in the future. "People are naturally pessimistic or optimistic. I am a pessimist, I have a anxiety disorder to prove. Tried to have a business, gave up when I realized I would have to borrow more money to keep on going. My dad on the other hand, he is eternal optimist. He was part of the 80es real estate bubble. It just was in his genes to believe that prizes keep on going up. And they might have, but there were factors at play that he could not foresee (falling of soviet union which influenced Finland).   To me, bubbles are born because of 1 simple reason. Government backed loans. If governments would not bail out banks that lend money to speculators. There would not be bubbles. It is that simple. But then the economy would freeze, since banks would demand perfect guarantees before they would loan you a cent.  One way to deal with that might be that central banks would naturally print money at a certain rate each year, knowing that a lot of that money will just burn in bad investments, basically forgiving banks for the bad loans they have made. Not too much to cause inflation, yet not too little to cause banks stop lending.  This money would be simply printed off thin air.   There would have to be a agreement on IMF level at what this ""burn rate"" could be to invidual countries. But since that burn rate could give an edge to a country that was allowed to print more, it would be very hard to come to an agreement how much each country could print.   Or, there could be a international agreement that the money would printed this way only during recessions.   Else we are stuck with bust and boom cycles, which are very destructive as I have witnessed first hand." "Yes, it is possible for you to refinance your existing auto loan, and so long as you can get the loan on more favorable terms (e.g.: lower interest rate), it is absolutely a smart thing to do. In fact, you would be well advised to do so as soon as possible if the car was a new car, if you refinance a NEW car soon enough you will likely still be able to get new car interest rates. Even if it is a pre-owned vehicle you shouldn't wait too long, since your car will only depreciate in value.  You will almost certainly get more favorable terms from any bank or credit union directly then you would when you go through the dealership, because the dealership is allowed to mark-up your interest rate several percentage points as profit for themselves. Your best bet would be to go to a local credit union, their rates tend to be most competitive since they are ""owned"" by their members." Can you reduce your interest rate? Talk to the lender. Maybe. Probably not. The rate reflects their perception of how much of a risk they're taking with the loan. But if all you're borrowing is $2000, the savings that you might get out of any adjustment to the rate is not going to be all that significant. Sure, it would be nice, but it's not going to be enough to make or break your decision to buy this car. The big savings will be that you're paying interest on a much smaller loan, which means you can reduce your payments and/or pay it off more quickly. REMINDER: NEVER TALK TO AN AUTO DEALER ABOUT FINANCING UNTIL AFTER THE PRICE OF THE CAR HAS BEEN NAILED DOWN -- otherwise they will raise the purchase price to cover the cost of offering you an apparently cheap loan. I have to second what the poster said above me. The person at the dealership is outright lying to you, and I really don't know where the misconception comes from. I work in finance and specialize in credit. Credit is your ability to repay. Simple as that. To lenders, constant carrying a balance on your credit cards looks like your don't have the ability/discipline to repay your debt and will look bad in the future if you are ever trying to borrow more. Indeed - the math. I bought my car 6 years ago. It was an ex showroom model (not demo) so came fully kitted and with a decent discount. I had the cash, but the salesman wanted me to take financing on half of the price *and gave me a discount* so that I would. It was a 3 year loan at a very low rate and was therefore lower than the cash price I had gotten. So I took the deal. I can only assume he was getting better commission rates for financing than he was selling cars. Either way, worked out for me.