Evaluating loan options and rebates

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When you look at financing that new car, your usual choices are going to be: Go with something the dealer offers you, or get financing on your own from a bank, credit union or other lender.

Deciding which way to go can be confusing because manufacturers and dealers offer a wide array of promotional finance deals. One car company a few years ago even offered a loan with no payments for the first year. Sounds good, huh? Until you looked at the fine print and discovered that it was a five-year loan and the payments for the last four years were jacked up to cover what you didn’t pay that first year.

So consider any special deals as just a starting point, especially when there’s a choice of cut-rate financing or a cash manufacturer’s rebate.

Rate is only one factor

A really low interest rate, undeniably, is attractive. But always keep in mind that the interest rate is only one of many factors and numbers that go into the overall cost of your new vehicle, albeit a major one. And it can be calculated in different ways: The APR, or annual percentage rate, is the best rate to use for comparisons.

Getting a “low, low” interest rate might not save you money in the long run if the numbers are inflated elsewhere in the deal. The same is true of a rebate.

So what’s a better deal: Snapping up an ultra-low financing rate or pocketing a $1,000 rebate? It depends.

First, everyone is eligible for a manufacturer’s rebate, which isn’t true for the financing deals, which may depend on a high credit score.

Consider this rebate vs. finance deal comparison:

Is it better to take a $1,000 rebate with an 8 percent interest rate? Or a 2.9 percent rate with no rebate?

Rebate vs. finance
  • Loan is $15,000 over four years
  • $7,500 x .05 = $375
  • $375 x 4 years = $1,500

Say a person considering a small sedan 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 sedan 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.

If you don’t want to do the math, use Bankrate’s calculator.

Of course, people with good credit ratings can get the best of both worlds by taking the rebate from the dealer and getting the same low rate — or lower — somewhere else.

Shop first for loan

The best way to buy and finance a car is to shop around for the loan first. Internet lenders have proliferated in recent years and often offer very good rates. They usually will approve you for a total amount to be financed before you go shopping, leaving you free to concentrate on price alone.

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 elsewhere.