How to Choose Between 0% Financing and Cash Back
In recent years, manufacturers have been offering a lot of loan incentives such as 0% financing.
Sometimes you have the choice between zero/low APR* financing or a cash back rebate.
So how do you decide between the two?
First of all, in order to qualify for a low APR* offer, you generally have to have great credit. If you don't, then it's an easy choice: take the cash rebate!
If you're one of the lucky ones with solid credit, you can arrange your own financing for between 3% and 6% in today's market.
What you need to do is figure out the difference in interest rates between the low APR* offer and what you can arrange on your own.
If you can arrange financing at 4% interest on your own, then a low APR* offer doesn't really look that great, especially if it's not 0% financing.
To get a very general idea of what a cash rebate is worth in relation to comparable interest rates, here are the calculations on a typical new car costing $25,000 (with state taxes of 5%).
As you can see, a $1,000 cash rebate is equivalent to a 2% difference in interest rates over a 48 month loan and 1.5% over a 60 month loan.
Cash Rebate 48 mo 60 mo
$1,500 3% 2.2%
$2,000 4% 3.2%
$2,500 5% 4%
$3,000 6% 5%
As an example. If you have the choice between 0% financing over 48 months or $1,000 cash back, which one should you take?
Again it depends on what kind of financing you can arrange on your own. Let's assume you can get a car loan at 4% over 48 months.
Since the difference between the 0% financing and what you can arrange equals 4%, it makes sense to take the financing deal because a $1,000 rebate is only equal to a difference of 2% interest.
It is recommended that you first check your credit score to see what kind of rates you could qualify for.
*Annual Percentage rate