Financial Education


Rebate Can Beat a Low-Rate Auto Loan

Mike Schenk / April 17th, 2018

Shopping for a new car? If you're in the market and have decided to purchase rather than lease, you'll find several financing options, including dealers are offering low-rate loans or cash-back rebates.

While it's nice to have choices, they can be downright confusing and expensive. Those low rates auto dealers offer you could also include "hidden costs":

  • Dealers' low-rate loans and rebates almost always are available only on slower-selling models. These cars may have lower resale values.
  • Dealers' low-rate loans can have bigger  prepayment penalties and can require bigger down payments.
  • Dealer financing plans usually are limited to dealer stock. That means you may have to sacrifice the color, style, and/or options you want. Unwanted options can add 25% to 30% to the sticker price of your car.

In the final analysis, you may be better off with conventional auto financing from your credit union. Visit your credit union first to explore its financing options.

Plan A The low rates most dealers advertise are for short-term loans. For example, one dealer offers 1.9% financing, but that's only available on two-year loans. A new $30,000 car with a $5,000 down payment (10% down) will require financing $25,000.

This translates to an astounding $1,062 monthly payment—out of reach for most buyers. The same dealer offers other options, which become less attractive as the loan term lengthens. The dealer's three-year loan has a 4.9% rate, while its five-year loan has a 5.9% rate, and its six-year loan has a 6.9% rate. Financing $25,000 on your $30,000 car at the dealer's 5.9% rate for five years results in a monthly payment of $482—a more realistic outlay for many consumers' budgets.

Plan B On the other hand, if you choose the dealer's rebate plan, you forego their low-interest-rate loan, but get a $2,500 cash rebate. By adding the rebate to your down payment, you'll reduce the amount you need to finance to $22,500. Then check out the credit union's auto loans to find the best rates and terms. 

So which alternative is best for you—the dealer's low-rate loan or the credit union's loan with the dealer's cash-back offer? Use this calculator to find out. Fill in all six fields before you hit calculate.

Provision of this calculator is not an offer of credit. Its use in no way guarantees that credit will be granted. This calculator is solely for informational purposes and provides reasonably accurate estimates; the calculations are not intended to be relied upon as actual yield computations.

 

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