Taking the Rebate or Zero Percent Interest
Saving Money on Low Rate Car Financing Options
Nov 1, 2009
When consumers buy a car, they are faced with a dizzying array of choices, from options to models to colors. Then, when they finally arrive at a decision for all these items, and the total price is computed, they need to find a way to pay for the car.
At this point, the car salesman will likely refer the customer to the financing department, where a large number of options will be presented. Due to the high price of a new vehicle, many consumers require financing to buy transportation.
If a customer can pay cash for the car, they need to decide if that is the best option for them. They must trade off the use of the cash versus the amount they will save on interest over the period of the loan.
Why Car Rebates are Offered
Dealers will sometimes offer financing incentives in order to make vehicles more affordable, with the goal of selling more cars. Two of these incentives are offering cash rebates or below market financing. Sometimes these are both offered, but lately the trend has been to offer an option, either the rebate or the financing.
In order for the consumer to know which is better in each instance, they need to do some planning before going to the dealer, or at least know what questions to ask of the financing person.
Deciding Between the Rebate and the Low Interest Rate
If the buyer decides to consider financing, the key pieces of information he needs are:
- Price of the vehicle
- Rebate offered by the dealer
- The market interest rate
- The below market interest rate offered by the dealer
- The length of the loan
Often interest rates will vary based on the length of the loan, so it is important to get all details. Once armed with this information, the buyer can make an intelligent decision. Consider the following example:
The dealer offers a rebate of $1,000 and market interest rate of 6%, or a 3 year loan at zero percent interest, or a five year loan at 3% interest, on a car loan of $20,000 before rebate.
Car Financing Calculations
Using a loan calculator, an Excel spreadsheet, or the dealer finance specialist, it works out that if the customer takes the $1,000 rebate at 6%, the payment on $19,000 for 5 years is $367.32. If the buyer opts for the 3% rate on $20,000, the payment amount for 5 years will be $359.37.
Clearly, in this situation, the below market interest rate is better, by almost $8 per month, or $477 over the life of the loan. Opting for the zero interest rate will result in $555.56. This will result in the lowest overall outlay of cash over time, but the buyer may not qualify or feel comfortable with a higher monthly commitment.
To generalize, for high dollar loans and longer terms, interest savings outweigh rebates, but knowing how the calculation works can help a buyer make an intelligent decision.
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