Rebate vs. lower interest: Which car incentive is right for you?
When comparing car-buying incentives, it’s important to consider the financial factors and do the math so you can make the right decision for you.
Giant stickers on each car in the lot promise big savings for buyers. “Cash rebate!” and “Low interest rate!” appear most often. Here’s what those deals mean:
- Cash rebate: The car manufacturer gives you a one-time rebate usually deducted from your car’s purchase price. Rebate amounts vary, but they usually range from $1,000 to $3,000.
- Low interest rate: The dealer offers an interest rate on a loan that is lower than the normal rates offered.
Car manufacturers usually allow only one deal per purchase. Sometimes you get to choose which offer to take. But keep in mind when evaluating the low interest rate offer that only those with excellent credit qualify for the lowest published rates. Consider the specifics to see whether the lower interest rate or the cash rebate is the better option for you.
Calculate your payments
Say you buy a $23,500 car and put no money down. The dealership offers a 60-month loan with the option of a cash rebate or a zero percent interest rate.
With zero-percent financing, even though you don’t pay interest on the loan, you end up with a higher monthly payment, and you pay $780 more over the life of the loan because you borrow more money.
Consider all the variables
If your goal is to end up with the lowest monthly payment, the cash rebate is typically the better alternative. However, variables such as how much money you put down, the total purchase price of the vehicle, any trade-in values, your local sales tax rate and the length of the loan can affect the total you pay. A longer loan term can lower your monthly payment, but you pay more total interest over the life of the loan.
The right choice for you depends on your priorities and financial situation. Understanding how car loans work can help you make a smart financial decision so you can drive away happy.