Even paying an extra $1,000 for the car makes a difference. For example, $26,000 versus $25,000 adds about $16 more to your monthly payment for a five-year loan at zero percent. To combat this, don't mention the zero percent or low-interest rate until after you've negotiated the car's purchase price.
Even if you do negotiate wisely and get a rock-bottom price, it still may make more sense to forgo the manufacturer financing for two reasons. First, many zero percent or low-interest car loans have shorter finance terms, which in turn may take your monthly payment out of your budget. Second, it's typical that cash-back rebates don't apply for buyers using the manufacturer's special financing.
For example, if the zero percent car loan or low-interest manufacturer loan is for four years in instances when you would typically finance for five years, the cost difference can be dramatic. On a $25,000 car loan through the manufacturer for four years, your monthly payment would be about $520 at zero percent interest or $541 with a 1.9 percent interest rate.
If you opted for the manufacturer rebate and a five-year loan term through a bank or credit union, you'd spend more on interest but your monthly payment would be substantially lower than the four-year manufacturer loan. For example, with a $2,500 manufacturer's rebate, you'd lower your financed amount to $22,500. At a 5 percent interest rate, your monthly payment would be $424, while at a 4 percent interest rate your monthly payment would be about $414.
If the length of the loan is the same between the manufacturer's special offer and the bank or credit union, the difference isn't as dramatic, but taking the manufacturer rebate and getting a bank or credit union car loan is almost always the better option.
On a $25,000 car with a choice of a $2,500 rebate or 1.9 percent financing over five years, it's a better deal to take the manufacturer rebate and get financing elsewhere. At a 4 percent interest rate with the $2,500 rebate, you'd save $1,364 in total payments. With a 5 percent loan rate with the $2,500 rebate, you'd still save $750 over the life of the loan.