The car buyer’s dilemma: Take the low interest rate or grab the rebate check?
So what’s a better deal: Snapping up an ultra-low financing rate or pocketing a $1,000 rebate for that shiny new car?
It depends, experts say. Comparing the numbers only tells part of the story.”One is delayed gratification and one is instant gratification,” says Jack Nerad, author of The Complete Idiot’s Guide to Buying or Leasing a Car.
First-time car buyers and people with little credit or dinged credit may be better off taking a cash rebate. Repeat buyers and people with good credit will probably do better with the low-rate financing.
Let’s start with that rebate. First off, everyone is eligible for a manufacturer’s rebate, which isn’t true for the financing deals.
“If you have any type of glitch in your credit history, you’re not going to qualify for the super-low rate,” says W. James Bragg, author of The Car Buyer’s and Leaser’s Negotiating Bible.
So people with no credit or less-than-perfect should be on the lookout for cars with a manufacturer’s rebate.
A rebate may also appeal to a first-time buyer who doesn’t have a lot of cash for a down payment or another car to trade in.
Speed is of the essence
Those in the hunt for a new car with an attractive rebate better prepare to do some digging — and to move fast. In the highly competitive world of automobile retailing, the rebates can come and go quickly.
Detailed listings of manufacturers’ rebates and discount financing can be found on several automotive-related Web sites, including Edmund’s
Automobile Buyers Guide, AutoSite, Autopedia and MSN’s Carpoint.
Shoppers eyeing the advertisements should expect to see more about the low-financing offers than the rebates. Super-low financing deals are all the rage. Car companies know that lots of people want to keep that monthly payment low and a low financing rate will help knock it down.
“Rebates are not advertised nearly as much because car companies believe consumers have the money for the down payment,” says Art Spinella, vice president of CNW Marketing Research in Bandon, Ore.
But which is a better deal? Here’s a quick way to compare a rebate against a rock-bottom financing deal, using a realistic, hypothetical example. The formula is from Bragg, who also runs Fighting Chance, a new-car pricing service.
Running the numbers
Say a person considering buying a Ford Contour must choose between taking 2.9 percent financing on a four-year, $15,000 loan, or taking 8 percent financing on a four-year loan and snapping up a $1,000 rebate.
Start by taking half of the loan amount and multiplying it by the difference between the two financing rates. This gives an idea of how much money can be saved per year with the cheaper financing rate. For simplicity’s sake, round off the 2.9 percent interest rate to 3 percent.
In this case, multiply 7,500 by .05 (5 percent, which is the difference between the two interest rates of 8 and 3) for a total of $375.
Then multiply that $375 by the number of years in the loan — in this case, four.
The answer, $1,500, is the amount this Contour buyer would save by taking a four-year loan at the lower interest rate. Because the rebate is $1,000, this customer would save an additional $500 by choosing the low-rate financing over the rebate.
The comparison gets a little fuzzier if the use of the rebate is considered. If the Contour buyer took the $1,000 and invested it aggressively for four years, the cut-rate interest deal might not look so good.
Or the Contour buyer might decide that the rebate would be best spent on that long-delayed trip to Europe.
“It depends on where you are financially and where you want to be,” says Nerad.
Comparison shopping for financing
While scoping out rebates and financing deals from manufacturers is an important facet of car buying, experts also urge people to compare financing rates from banks, credit unions and finance companies.
“Shop around,” Nerad says. “You’ll know what your options are.”
Those who cannot qualify for the ultra-low rates may be able to beat the rate that the dealer offers.
Remember, the car dealer is little more than a middleman when it comes to financing. Often, dealers bump up the auto loan rates of the banks and finance companies with which they do business. A customer may do better by getting the loan directly from a local bank or credit union.
“Auto dealers make as much money on the financing end of this arrangement as they do on the sale of the car,” Bragg says.
Mark Eskeldson, author of the book What Car Dealers Don’t Want You to Know, adds, “They’re in the business to make as much money off you as possible.”