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

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Although both a cash rebate and 0 percent financing can help you save money on a new car purchase, they operate differently. A cash rebate is the amount of money given back to the car buyer in exchange for agreeing to purchase a vehicle, while a 0 percent APR car deal is an auto loan that comes with no interest or fees. A large rebate can provide a big portion — or even all — of a down payment. But 0 percent financing reduces the monthly payments on an auto loan since you’re not paying interest.

Unfortunately, most auto manufacturers don’t let you combine both deals, so you have to make a decision. Neither incentive is bad, but that doesn’t mean they’re equally good for everyone. When choosing between 0 percent financing and a rebate, you have to weigh the pros and cons of each one.

Can you get 0 percent financing?

Captive finance companies — finance companies tied directly to an automaker — sometimes offer 0 percent deals for a select number of new cars. Whether you can get 0 percent financing depends on several factors, including the type of car you’re trying to buy and your credit score, debt-to-income ratio and income.

If the automaker offers this incentive for the type of car you want to buy, you’ll have to be a well-qualified borrower. This typically means having an excellent credit score — you’re more likely to qualify if your score is above 781.

A 0 percent auto loan rate is a great option if you meet the lender’s requirements and need to finance your new vehicle. Even if you don’t need to finance, a 0 percent APR auto loan could allow you to invest cash that otherwise would have gone toward loan interest.

Pay down with your rebate

If the auto manufacturer offers you a rebate for the car you’re interested in, you have two options: pocket the money or pay down the purchase price.

If you go into the showroom with a large down payment in hand, you can always take the rebate in cash. But for most people, the rebate will be credited toward the purchase price and might even be large enough to cover the entire down payment.

When making your decision, you’ll need to consider the vehicle price, the amount of the rebate and the interest rate you’ll be paying.

Calculate your payments

To compare the 0 percent APR versus 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’d subtract the cash back amount from the loan amount.

Here’s an example of how this works. Let’s say an automaker has a 0 percent finance option on a car you love. The car is $25,000 and the length of the loan is 60 months. That same auto manufacturer also offers a cash back bonus of $2,500 with a 4 percent interest rate and a loan term of 60 months.

If you compare taking the 0 percent APR offer and making no down payment to taking the 4 percent rate and using the $2,500 rebate as your down payment, the rebate offer could save you $138 on the total price of the car.

Since the cash rebate option is cheaper, it may be easy to say it’s the clear winner. However, before making a decision, you should consider the pros and cons of each option. Also, the math could be different depending on the amount of the rebate and the length of the loan offered.

Pros and cons of a 0 percent APR

Interest-free financing deals have several pros, which include:

  • 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.

Here are the cons you should consider before getting a 0 percent APR loan:

  • Only available for select vehicles. Zero percent deals are only offered on a limited number of vehicles, so it’s likely that the car you want won’t come with this special financing deal.
  • Can be more expensive. Since 0 percent deals are only offered for new cars, you’d most likely pay more for the new car than you would for a used car financed at a higher APR.

Pros and cons of a cash rebate

The cash rebate also comes with pros and cons. Here are some of the pros:

  • Can be used for down payment. As discussed above, the cash rebate can be put toward your down payment, lowering the amount of the auto loan you take out.
  • 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.

Here are some of the cons of choosing the cash back option:

  • 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.

Next steps

When you’re choosing between getting 0 percent interest auto financing or a cash back rebate, compare their advantages and disadvantages. For example, accepting a 0 percent auto loan with a short loan term could increase your monthly payments.

Whichever deal you take, make sure you can afford to repay the auto loan. Also consider getting preapproved by a different lender in case you’re not approved for the automaker’s special financing.

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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
Associate loans editor