In such a competitive marketplace, almost all car dealers are offering some type of incentive to get you to buy a car now. Some offer no interest financing; others offer low interest rate car loans while others offer cash rebates.
Of course, you can't have your cake and eat it too. These options are offered as an either/or, you can't have low interest rate car loans and cash rebates. Deciding which option is best for you when you are buying a new car depends largely on your individual circumstances.
Low Interest Rate Car Loans
Dealers often advertise no interest or low interest rate car loans. What they fail to mention, at least in print large enough for you to be able to read, is that very few people qualify for these loans. With low interest rate car loans, a borrower must have an excellent credit history. If you have even just a few blemishes on your credit report, low interest rate car loans are not going to be available to you.
For someone with excellent credit, a low interest rate car loan can be an excellent incentive when buying your new car. The low interest rate can save you thousands of dollars over the life of the loan. With a low interest rate, your payment is typically dramatically lower as well. Because of this, many buyers are able to afford a more expensive vehicle than they would be able to with a traditional car loan. For instance, the payment on a $25,000 loan at 5.9% is roughly the same as a payment for a $28,500 at 0.9%.
If you have poor credit, this is definitely the best option for you. For the cash rebate, the dealer doesn't care how your credit report reads. Take the cash and run.
But what if you have good credit? This makes the decision a little harder since you probably have the ability to choose which option works best for you. A simple calculation can lead you in the right direction.
To decide between the two options, you need to have three figures available to you: 1) the amount of the cash rebate; 2) the amount of interest you will pay on the low interest rate loan; and 3) the amount of interest you will pay for traditional financing. With all of these figures in hand, you can make an accurate comparison between the options.
You can calculate the amount of interest you will pay on a loan through a variety of loan calculators on the Internet such as Eloan's car loan payment calculator.
Let's look at a calculation now. Assume you are buying a $25,000 vehicle and would like to finance it for five years. The dealer gives you the following options:
1) A cash rebate of $2,500 with a five-year loan at 5.9%.
2) A low interest rate car loan at a rate of 1.9% for five years.
| ||Cash Rebate Option ||Low Interest Rate Option |
|Rebate ||$2,500 ||None |
|Interest paid ||$3,929 ||$1,226 |
|TOTAL paid ||$1,429 ||$1,226 |
As you can see from this example, your best option is to take advantage of the low interest rate car loans the dealer is offering. Of course, this calculation can vary widely based on the dealer's loan terms.
Another issue to consider when deciding if the rebate is the best offer is what you will do with the cash. You could invest the money and depending on your return, it could be far more lucrative to take the rebate with the higher interest rate loan. Another option is to pay off other debts. If you have credit card debt or other small personal loans with high interest rates, this can be an excellent way to rid yourself of the debt. If one of these is the situation for you, the decision of which option is best could be a little more involved but still a very manageable calculation.
The last thing to consider is that the cash rebate is immediate. With low interest rate loans, the savings will be over time and not as noticeable as having $2,500 sitting in your savings account. You must decide if you want the cash now or you would like it over the long term.
In many cases, there will not be a dramatic difference between the savings with cash rebates versus low interest rate car loans. But by being smart and calculating beforehand, you could end up with an extra couple hundred dollars in your pocket.