October 29, 2009

New Car Deal : Should You take Cash Rebate or Low Interest Financing?

If you pay attention to new car advertising when they offer buyer incentives they are usually offering a cash rebate or low interest financing. So you can either get $2000 cash back -OR- you can get 0% interest on a 36 month loan. The key word in that sentence is OR because it means you're choosing between two incentives. To know which one is better you first should shop around and see what kind of interest you can get otherwise and then compare the two choices with an online calculator.

Bankrate has a calculator to compare low interest loan versus a cash rebate.

Lets look at a couple examples.

0% for 36 months OR $2000 cash

Right now Ford is offering a 0% loan for 36 months -OR- a $2000 rebate on a F150 truck. Lets say the truck costs $25,000 total new and the best interest you can get on a loan otherwise is 7%. If you plug all those numbers into the bankrate calculator they say that "You would save $625 by taking the lower interest rate." So you should take the 0% loan instead. You'll save more in interest than you'd save with the $2,000 on a 7% loan.

0% for 60 months and $750 cash OR $2000 cash

Nissan is offering a deal where you can get a Nissan Sentra with either 0% financing for up to 60 months and $750 cash back -OR- you can get $2000 cash back. To evaluate this deal you can first figure that either deal will get you $750 cash back. So the difference is 0% financing or $1250 cash. Take the price of the car and subtract the $750 and then compare the difference between the other two features. If we assume that the Nissan Sentra will cost $20,000 then you figure the price based on that amount less $750 or $19,250. If we use the calculator and compare a 4 year loan at 0% with the price of $19250 versus taking the rebate of $1250 and financing at 7% then the calculator says: "You would save $1445 by taking the lower interest rate." So again the cheap financing is a better option.

If you can get a good loan the rebate might be better

If you can get a really good loan on your own then a 0% loan isn't as beneficial. Lets look at both those examples again and see how they compare if you can get a good finance rate at your bank. Lets say that you can get a 4% loan from your credit union. If you run the numbers again then you find that for the Ford F150 you save $500 with the rebate but for the Nissan Sentra you save $290 with the lower interest.

I don't know of any easy rules of thumb to compare low interest financing versus cash rebate deals. The best way to compare the two is to use an online calculator.

Personally I think buying a newer used car is your best option financially. But many people like new cars based on their reliability and there might be some very good deals out there nowadays on new cars. And there may be certain situations where buying is more compelling like when you get a tax credit for buying a hybrid.

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