Cash Back or Low Interest Calculator
Auto manufacturers may offer either a cash vehicle rebate or a low interest rate with a car purchase. Very often, these offers are mutually exclusive and only one is available. Use the calculator to find out which of the two is the better offer.
The Low Interest Rate Offer is Better!
The low rate will save you $2,253 in interest, which is larger than the cash back of $1,000.
With Cash Back Offer
With Low Interest Rate Offer
Vehicle Cash Rebate
A vehicle cash rebate is simply put, an additional deduction on the purchase price of the car; the amounts generally range anywhere between $500 to $3,000. The majority of them originate from car manufacturers for reasons like trying to get rid of old inventory to make way for new, and thus offer these rebates to further incentivize buyers.
Rebates may be distributed in several different ways. An instant rebate on a car is an immediate deduction off the negotiated price of the car. While it may be the most ideal form because of its instantaneous application, some are in the form of mail-in rebate; they arrive in the form of a check or prepaid credit card four to eight weeks later. Car dealers use the latter method in the hopes that purchasers forget to sign up for the rebate during a given window, thus losing out on the potential savings.
However, don't be fooled into thinking rebates turn any potential purchases into once-in-a-lifetime deals. Not only for new cars, but for anything being sold, a big discount is usually precipitated by a secretive hike in the price of a good, generally rendering it only marginally discounted. It takes advantage of the psychological mindset of every consumer: a visual image of an actively applied discount is heavily enticing. For as big of a purchase as a new car, seeing thousands deducted from the final purchase price just might push hesitant buyers over the fence. Although car purchasers who opt for rebates do end up getting discounts, they are generally less than what is advertised or implied. There is a certain threshold where a sold car ends up becoming a loss to the dealer, and only in extremely rare cases will it ever fall under this bottom-line. Use the Calculator to determine whether the marginal discount is financially better than an alternative, lower interest financing option.
In the United States, several states view cash rebates as payments from auto manufacturers. For example, a purchase of a vehicle at $30,000 with a cash rebate of $2,000 will have sales tax calculated based on $30,000, not $28,000. Luckily, many states do not tax cash rebates; these states are Alaska, Arizona, Delaware, Iowa, Kansas, Kentucky, Louisiana, Massachusetts, Minnesota, Missouri, Montana, Nebraska, New Hampshire, Oklahoma, Oregon, Pennsylvania, Rhode Island, Texas, Utah, Vermont, and Wyoming.
Aside from generic rebates available to any potential buyer, there can be special rebates such as those for people who serve in the military, current students, or first-time buyers.
Low Interest Financing
Excellent credit scores are usually mandatory to qualify for extremely low or even zero percent financing. Be sure to find out whether low interest financing is even an available option before considering. As with many of our personal finance calculators, we highly recommend taking steps towards achieving desirable credit scores to qualify for the best financing options, whether it's for a potential credit card application, new mortgage loan, or in this case, financing for a car purchase.
Low introductory rates are very possible for car buyers with great credit history, but the truth is that many times, vehicle rebates can be just as good. Use the calculator for help. Generally, it comes down to whether the rebate amounts are higher than the total interest saved from the low introductory rate. A good way to make low interest financing much more favorable is to pay off large portions of the loan during the 0% or low rate period so payments will not be as high when the normalized rate kick in.
The average length of car loans in this day and age are the longest they've ever been. In the past few years, it hasn't been uncommon to see loan terms offered in the ranges of 84 or even 90 months! This is generally due to several reasons; the first is to make relatively expensive cars more affordable for the average car buyer. By extending the life of the loan, the spread out monthly payments appear smaller. The second is as an incentive for consumers to purchase new cars more often. Generally, we do not recommend such long loans, even at low rates. Avoid them if possible.
This calculator computes cold, hard figures when arriving at the best financial choice between the two, but remember to take into account outside factors wisely. As an example, it's probably better to consider the cash rebate option if there is a current expensive medical emergency that needs funding. Conversely, it can be better for someone with subpar credit history with not enough funds upfront to go with financing, instead of taking out a separate, external personal loan just to go for the rebate option.