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Rebate is a money term you need to understand. Here’s what it means.

What is a rebate?

A rebate is a manufacturer’s way of reducing the price of a purchase and enticing a potential buyer. Rebates are available on all kinds of consumer products, including computers, personal health care items, real estate transactions, automobiles and even candy.

Deeper definition

There are several reasons that sellers offer rebates rather than simply lower the price. They include:

  • The knowledge that busy consumers may forget to mail the rebate.
  • The ability to offer a store credit rather than cash.
  • The knowledge that consumers have to take steps to receive a rebate, like providing the right documentation.
  • The ability to sell consumer information to a third party.
  • The knowledge that rebates convince people who are otherwise on the fence to make a purchase.

Need to know more? Try out our rebate calculator.

Rebate example

When it comes time to purchase a large ticket item like a car, a rebate offer can make the difference between a consumer making the purchase or deciding against it, particularly if that consumer has a poor credit score.

Say the current interest rate on an auto loan is between 4 and 5 percent for a borrower with good credit. A borrower with poor credit is more likely to pay an average of 10 percent to 13 percent, depending on how bad their credit is.

For example, a borrower with good credit borrows $20,000 to buy a car. That borrower pays 4.5 percent interest on a 60-month car loan, and his monthly payment is $372.86.

Someone with poor credit borrows that same $20,000, but due to his credit score, pays 11.5 percent interest on a 60-month loan. His payment for the same vehicle is $439.85, or $66.99 more per month.

Over the course of the 60 month loan, that borrower will have paid $4,019.40 more for the vehicle. In a case like this, the offer of a rebate can help minimize the amount of money he is paying at a higher interest rate.

Worried about interest rates? Consider these seven ways to improve your credit score.

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