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Is it Better To Get a Car Rebate or Low Interest For the Car Loan

Low interest! Car rebates! Cashback! Year end deals! The holiday season is in full swing now, so why shouldn’t the car dealerships get together to figure out how to part you from your money? It’s only natural — they’re going to want to make absolutely sure that they are able to get you in the door with enticing offers. If you have good credit, you’re going to be able to get a lot farther than someone with challenged credit. And these days, getting into a new car is easier as dealers realize that sometimes it’s better to accept someone with a little more credit risk than end up losing the sale just because they couldn’t pull financing. If you have a good down payment you might be able to get into something really nice — you just never know until you find out.

However, before you can actually get too excited about the prospect of getting a new car, you’ve got to answer that pesky problem of financing. You need to figure out whether you should go with the car rebate or with the low interest loan. In a perfect world, you would get both. But this is capitalism at its finest — you’re going to have to pick one in exchange for the dealer giving you a bit of a break. It’s only fair, you know.

Well, in order to figure out which choice actually makes the most sense, you’re going to need to do some break even calculations. We’re going to provide a small example here to show you what we mean:

We are going to assume that you are purchasing a vehicle that offers 2.8 percent financing or $2,000 cash back — the car is $20,000 dollars. To avoid problems creeping in, let’s assume that there is no tax to deal with. We have to figure that the cash back will be pulled into part of the loan for comparison purpose. This means that you’re going to have $22,000 to finance at an average term of 48 months. This will be at 2.8 percent, which gives you a payment of around $485.01 every month. That’s quite a bit of money, but hey — welcome to the world of financing a car, enjoy your stay right?

Right. Well, if you could go to your bank for the financing, you’re going to have to fork out a lot more in terms of interest rates. The average bank loan is about 7 percent — and that’s if you have decent credit. We don’t even want to get into what’s going to happen to you if you don’t have good credit, you know what we mean? It’s definitely a squeeze!

If you go to the bank, you don’t have the cash back — so it’s just the $20,000 that we’re trying to finance. $20,000 financed at 48 months at 7 percent is going to be $478.92. That’s not that much difference — and you might have a better relationship with your bank, to the point where you can work out even better refinancing down the road as long as you prove that you can handle the car payments.

The cost of borrowing comes into play when it comes to understanding why the low interest rate offer is actually a worse deal than the bank offer. You have to add the $2,000 back into the cost of borrowing on top of the interest ($1,280.48 if you’re not playing along with your calculator)

Of course, we’re going about all of this the long way. If you really want to make sure that you know what’s going on you might want to just use an online calculator that lets you break down both offers and tell you which would be better. There’s actually quite a few, and a quick web search will provide you with more links than you can shake a low interest rate offer at — we promise! Good luck out there and make sure that you are always looking at the bigger picture rather than just taking the offer that looks shiny! Start today!