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.
Well, if you can get a loan for 3.8% and reliably invest for 7% returns, then you should borrow as much as you possibly can - the whole employment/existing loan situation doesn't even enter into it! But as they say, if something is too good to be true, it probably isn't (true). The 7-8% return are not guaranteed at all, but the 3.8% interest is. And while we're at it, 3.8% for an unsecured loan sounds pretty damn low, I would be really doubtful about that. I mean, why would the bank do that if they could instead invest the money for 7-8%? In the U.S., most car dealers provide lease financing through one company (usually a subsidiary of the auto manufacturer). Whereas they provide loan financing through a variety of companies, some of whom offer very high interest rate loans and sell the loans as collateralized debt obligations (CDOs). Have you checked whether Chase or First Tech Credit Union offers a suitable car lease? I mean, at a personal level, I do this all the time. I will absolutely take advantage of low interest financing offers if I know I can make more money with the outstanding balance than will be drawn in interest.  It can also make sense from a risk management perspective: I need liquidity even if I can cover the cost, I anticipate needing a large sum of cash over a short interval during the finance period. If I were to pay all upfront the cumulative expenditures would Darwin me too close to my safety threshold for my comfort level, but by financing I can distribute the risk and keep a higher margin for error over the course of the loan. You have a few options and sometimes challenges help us improve our situation. First, you can not borrow to buy a car.  Reducing the massive depreciation that cars undergo will help you be wealthier.  It is hard to find a good use car that you can buy for cash, but it will play out best for your finances in the long run. If your heart is set on borrowing, I would encourage you to go to the bank/credit union where you have your checking account.  They will see your history of deposits and may grant you a loan based on that.  Also you are likely to get a better deal from the bank than from the car dealer. Thirdly, you can simply go to your employer's HR department and ask them.  Surely someone has applied for a loan during the company's history.  What did they do for them? "Yea but they might feel swindled and that you pulled a fast one on them, and not be as willing to give you good deals in the future.   Like, as a totally non mathematical example, they have a car for $50k. They lower the price to 40k with a financing that will bring total payment to 60k. Their break even on that car is let's say 45k. The financier cuts them a commission on expected profits, of maybe 7k? They made an expected 2k on the car. But if you pay it all off asap, they may lose that commission, be 5k in the hole on the sale, and pretty upset. Even more upset if they finance in house.   So when you go back to buy another car they'll say ""fuck this guy, we need to recoup past lost profits, don't go below 4K above break even.""   I'm not really 100% on how financing workings when it comes to cars but from my background in sales this is the bar I would set for a customer that made me take a loss by doing business with them if they tried to come back in the future.  This doesn't take into account how car dealerships don't own their inventory, finance all of their cars and actually ARE willing to take a loss on a car just to get it off the lot some times." Dude- my background is in banking specifically dealing with these scenarios. Take my advice-look for a balance transfer offer-credit card at 0%. Your cost of capital is your good credit, this is your leverage. Why pay 4.74% when you can pay 0%. Find a credit card company with a balance transfer option for 0%. Pay no interest, and own the car outright. Places to start; check the mail, or check your bank, or check local credit unions. Some credit unions are very relaxed for membership, and ask if they have zero percent balance transfers. Good Luck! I'd pay cash.  Car loans are amortized, so sometimes you can get upside-down on the loan between 18-30 months because you are pre-paying interest. This can get you into trouble if you get into an accident. Given the low rate and the type of car you're buying, you're probably fine either way. "You are correct to be wary. Car dealerships make money selling cars, and use many tactics and advertisements to entice you to come into their showroom. ""We are in desperate need of [insert your make, model, year and color]! We have several people who want that exact car you have! Come in and sell it to us and buy a new car at a great price! We'll give you so much money on your trade in!"" In reality, they play a shell game and have you focus on your monthly payment. By extending the loan to 4 or 5 years (or longer), they can make your monthly payment lower, sure, but the total amount paid is much higher. You're right: it's not in your best interest. Buy a car and drive it into the ground. Being free of car payments is a luxury!" The risk besides the extra interest is that you might be upside down on the loan. Because the car loses value the moment you drive off the lot, the slower you pay it off the longer it takes to get the loan balance below the resale value. Of course if you have a significant down payment, the risk of being upside down is not as great. Even buying a used car doesn't help because if you try to sell it back to the dealer the next week they wont give you the full price you paid. Some people try and split the difference, get the longer term loan, but then pay it off as quickly as the shorter term loan. Yes the interest rate is higher but if you need to drop the payment back to the required level you can do so. So many answers here are missing the mark.  I have a $100k mortgage--because that isn't paid off, I can't buy a car?  That's really misguided logic. You have a reasonably large amount of college debt and didn't mention any other debt-- It's a really big deal what kind of debt this is.  Is it unsecured debt through a private lender? Is it a federal loan from the Department of Education? Let's assume the worst possible (reasonable) situation.  You lose your job and spend the next year plus looking for work.  This is the boat numerous people out of college are in (far far far FAR more than the unemployment rates indicate).  Federal loans have somewhat reasonable (indentured servitude, but I digress) repayment strategies; you can base the payment on your current income through income-based and income-continent repayment plans.  If you're through a private lender, they still expect payment.  In both cases--because the US hit students with ridiculous lending practices, your interest rates are likely 5-10% or even higher. Given your take-home income is quite large and I don't know exactly the cost of living where you live--you have to make some reasonable decisions.  You can afford a car note for basically any car you want.  What's the worst that happens if you can't afford the car?  They take it back. If you can afford to feed yourself, house yourself, pay your other monthly bills...you make so much more than the median income in the US that I really don't see any issues. What you should do is write out all your monthly costs and figure out how much unallocated money you have, but I'd imagine you have enough money coming in to finance any reasonable new or used car.  Keep in mind new will have much higher insurance and costs, but if you pick a good car your headaches besides that will be minimal. If you are a subprime borrower, that may not be an unreasonable rate given the risk they are accepting. In any case, it's what you agreed to. As others have said, you could/should have shopped elsewhere for the loan. In fact, you can still shop elsewhere for a loan to refinance that vehicle and thus lower the rate, unless the existing loan has equally obnoxious rules about that. A lender will look at three things when giving a loan: Income. Do you make enough money each month to afford the payments. They will subtract from your income any other loans, credit card debt, student loan debt, mortgage. They will also figure in your housing costs. Your Collateral. For a mortgage the collateral is the house, for a car loan it is the car. They will only give you a loan to a specific percentage of the value of the collateral. Your money in the bank isn't collateral, but it can serve as a down payment on the loan.  Your Credit score. This is a measure of how well you handle credit. The longer the history the better. Using credit wisely is better than not using the credit you have.  If you don't have a credit card, get one. Start with your current bank. You have a history with them. If they won't help you join a credit union. Another source of car loans is the auto dealer. Though their rates can be high. Make sure that the purchase price doesn't require a monthly payment too high for your income. Good rules of thumb for monthly payments are 25% for housing and 10% for all other loans combined. Even a person with perfect credit can't get a loan for more than the bank thinks they can afford. Note: Don't drain all your savings, you will need it to pay for the unexpected expenses in life. You might think you have enough cash to pay off the student loan or to make a big down payment, but you don't want to stretch yourself too thin. Is it really worth the interest you'd pay over a year for a relatively minor and temporary bump to your credit score? I mean, you just bought a car so I'm assuming you probably aren't looking for another loan in the near future. The car dealership doesn't care where you get the cash; they care about it becoming their money immediately and with no risk or complications. Any loan or other arrangements you make to raise the cash is Your Problem, not theirs, unless you arrange the loan through them. What's a good proxy for the return of the market when utilizing CAPM for a WACC build up? I know I could rip data from Domadaran, but I'd like to calculate it for myself. Maybe S&amp;P 500 earnings yield plus the 10yr? Also don't like taking the round assumption of 7%.