Chrysler is coming out with an offer maybe too good to resist. Knowing how much gas prices are hurting customer’s pockets are giving their new customers the following option: choose a cash rebate ($5,500) or only $3000 cash rebate and the opportunity to pay $2.99 fixed price per gallon of gasoline for the next three years. The program is limited to 12,000 miles per year so how many gallons of gas you get to use at that price will depend on the car you get. But let’s say you choose a high mileage car (28mpg, this is the example used in the article), then you can fill up 428.50 gallon of gas per year at that price.
According to this article in the Wall Street Journal, economists expect the price of gas to average $3.45 over the next 12 months. This is the math I came up to help buyers decide which offer is better:
- Choice one: Take $5,500 cash rebate at time of purchase. I am going to assume the buyer applies the rebate amount to lower the amount of their car loan (assumed at $20K), if the buyer took a five year loan at a rate of 6.55%. Then by taking the cash rebate the buyer would save $4614 in interest payments over the life of the loan.
- Choice two: Take a $3,000 cash rebate and the opportunity to fill up gas @2.99 fixed price for 12,000 miles annually. Let’s assume the buyer chooses to apply the rebate to the car payment and reduce the size of his/her loan. Then at the end of five years and at a rate of 6.55%, the buyer would save $2516 in interest payments. Let’s also assume the mpg for the new car is 28 average and that translates to 428.50 gallons per year. Let’s take the average per gallon price as predicted by economists, the the buyer saves $197.11 per year by taking advantage of the fixed gas price. $197 in yearly savings doesn’t sound like very much.
If I were the average Jane this is the math (and train of thought) I would do at the dealership: OK, I can get $5500 right now or I can get $3000 and enjoy fixed gas price of gas of $2.99 for three years. My savings would have to equal at least $2500 over the next three years for this offer to sound good to me. So that’s about $833 per year or $1.94 per gallon of gas. Gas would have to be around $4.94 for me to come out even. I know this assumes a very rough scenario with zero inflation (not likely). But I don’t think I would take that offer.
Is there a financial expert out there who could convince me otherwise?