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Should you take a rebate or 0 percent financing? It depends

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Both a cash rebate and 0 percent financing can help you save money on a car purchase, but they work differently. A cash rebate is money given back to the car buyer in exchange for purchasing a vehicle, while 0 percent APR is for an auto loan that comes with no interest or fees.

Unfortunately, most auto manufacturers don’t allow buyers to combine both deals, so you will have to make a decision. When choosing between 0 percent financing and a rebate, consider which would benefit your finances the most.

How to choose between 0 percent financing and a rebate

Qualifying for a 0 percent financing offer is more difficult than getting a cash rebate. The best option will depend on your finances and overall goals.

1. Determine if you qualify for 0 percent financing

Whether you can qualify for 0 percent financing depends on several factors, including the type of car you’re looking to buy and your credit score, debt-to-income ratio and income.

If the automaker offers this incentive, you need to be a well-qualified borrower. This typically means excellent credit — you are more likely to qualify if your score is above 780. Check your credit score before you apply to see if you meet the minimum requirement.

Without excellent credit, you may not be eligible for 0 percent APR. In this case, finding a different lender and opting for the rebate is your best option.

2. Find out how much the rebate covers

Rebates are typically provided by the car manufacturer, not the dealer, and in most cases the money is applied as the down payment for the car. But if you have plenty of cash to pay the down payment on your own, the rebate can be sent to you in the form of a check instead.

Before deciding, find out exactly how the money will be applied to your purchase. In some states, the money may actually be deducted from the vehicle’s purchase price before taxes are calculated. This can be particularly beneficial because by reducing the car’s sale price, the rebate has the added benefit of reducing the taxes you pay on the purchase. The key is to find out in advance exactly what the rebate covers.

3. Calculate the cost of both options

To compare the payment options for both the 0 percent APR and the cash back option, use a car payment comparison calculator. For the 0 percent option, the total amount of the loan would be the price of the car since no interest is charged. To calculate the cash back option, you would subtract the cash back amount from the total loan amount.

As an example, a manufacturer may offer either 0 percent financing or a rebate of $1,000 on a car worth $35,000. If you qualify for a 4 percent interest rate on a loan term of 48 months, the 0 percent financing will save you money.

But since there are so many moving parts to an auto loan — sales tax, trade-in and down payment being a few big components — the savings will vary widely. Take into account everything you will pay upfront and over the course of the loan to find the right choice.

Pros and cons of a 0 percent APR

Interest-free financing deals have several pros, including:

  • Lower monthly payments. Since you wouldn’t be responsible for paying interest, depending on the length of the loan, your monthly payment could be lower than it would be with the cash rebate option.  
  • Quicker repayment. You could repay the loan sooner by paying more than the minimum monthly payment since your payment amount goes toward the principal only and not interest.  
  • Less paid toward fees. There will still be dealership or manufacturer fees for buying the car — but you will not have to worry about paying fees to a lender. This is another way 0 percent APR keeps costs low. 

There are also cons you should consider before getting a 0 percent APR loan:

  • Only available for select vehicles. Zero percent deals are typically only offered on a limited number of vehicles, so the car you want may not come with this special financing deal.  
  • Can be more expensive. Since 0 percent deals are only offered for new cars, you would most likely pay more for the new car than you would for a used car financed at a higher APR.  
  • Still need a down payment. Even a loan without interest can still be costly if you borrow too much. Make sure you have a large down payment to offset the higher purchase price of a new car. 

Pros and cons of a cash rebate

Cash rebates also come with benefits and drawbacks. Some of the benefits include:

  • Can be used for down payment. As discussed above, cash rebates can be put toward your down payment, lowering the total amount of the auto loan. 
  • May offer more savings than a 0 percent deal. In some cases, you might be able to save more money with a cash back deal versus a 0 percent auto loan option.  
  • Potential for low rates. It may not be 0 percent, but auto loans for people with good to excellent credit are currently low. The majority of your monthly payment will still be going to principal if you opt for a rebate. 

You may also face some drawbacks, including:

  • Limited selection. Like 0 percent financing, cash rebates are only offered on a limited selection of vehicles. You may find that the manufacturer of the car you want doesn’t offer cash back.  
  • Higher price. Similar to the 0 percent option, manufacturers usually offer cash back deals only on new vehicles. The price of a new vehicle may not fit your car budget.  
  • Other fees possible. Your auto loan may charge origination fees and prepayment penalties on top of the sales fees you pay when buying a car, which could reduce the overall savings of a rebate.  

The bottom line

Even if 0 percent APR is an option, you should still apply for preapproval with another lender first. This way, you can compare total interest paid against the value of a rebate.

When you feel ready to make a decision, consider the costs versus savings carefully. Zero percent APR will mean you don’t pay anything in interest, but you could offset interest paid with a high-value rebate.

It all comes down to what you’re looking for when buying a new car, so commit to researching available deals — and potentially waiting for a better deal to come along.

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Written by
Jerry Brown
Contributing writer
Jerry Brown is a contributing writer for Bankrate. Jerry writes about home equity, personal loans, auto loans and debt management.
Edited by
Auto loans editor