You're at the car dealership with your dream vehicle at the tip of your fingers. Then the dealer asks, would you like a rebate or 0% interest?

 

The answer will depend on a number of factors such as, your credit score and how much you are willing to pay on a monthly basis.

 

First, it is important to understand, 0% interest is usually only available to “well-qualified” buyers. This means if your credit score is not at least 700 (may be higher for some offers) the 0% option is off the table. According to a recent survey by Edmunds.com, in July of 2017, only 11% of buyers took the 0% deal.

 

In addition, 0% interest is often tied to shorter loan terms such as 36, 48 or 60-month terms. With today’s average loan amount exceeding $30,000, many buyers are opting for 72 and 84-month terms. For example, let’s look at a loan amount of $30,000; with a 48-month term and 0% interest, the payment would be $625.00. Whereas, the same loan amount with an 84-month term and an interest rate of 4.49%, the payment would be $416.67.

As you can see, by extending the loan term, the payments become substantially lower (even if the interest rate is above 0%). This often has an impact on what car you can afford.

 

If you take the 0% financing, the dealer will not offer you the same discount off the price of the car. Remember, lenders don’t give money away for free. The manufacturer and/or dealer is paying the lender to give you the benefit of 0% financing. That money has to come from somewhere so it is usually built into the price of the car.

 

Opting for the rebate instead of the 0% financing will reduce the overall price of the car. This means in the future, when you are ready to trade in the car you will not owe as much (assuming you still have a loan balance). The amount you receive for your trade-in may even be enough to pay off your existing loan balance.

 

In some states, the rebate reduces the purchase price of the car which in turn results in a reduction in the sales tax. If the rebate is $2,000 and there is a 6% sales tax the rebate will save you $120 in sales tax. Pro Tip: If your state does not allow this ask the dealer to reduce the price by the amount of the rebate and not list the rebate on the sales order in order to reduce your sales tax.

 

For our discussion let’s assume the purchase price of your new vehicle is $20,000 (dream on) and the manufacturer is offering a $2,000 rebate or 0% financing for 5 years. We will assume no additional discounts and that your credit score is in the 700-750 range.  We will ignore the cost of title and tags as these are the same in both instances.

As you can see, in this example the rebate will save you nearly $900 over the life of the loan. In addition, if you trade the vehicle in early you will owe less at time of trade it.  After two years, the balance on the loan with the rebate is about $11,730 while it is $12,720 under the 0% interest plan, a difference of almost $1,000.  After 3 years the balance on the loan with the rebate is $7,918 versus a balance of $8,480 on the 0% loan, a difference of $562.

 

Choosing the rebate and financing your vehicle with Advantage Financial is almost always the best option. You will pay less for the car, owe less, and you have more flexibility with the monthly payments (options may include bi-weekly payments, 6, or 7-year terms, etc.). The details depend on the size of the rebate in relation to the size of the loan and the interest rate for which you qualify. If you don’t qualify for 0%, the rebate will always be the better option. If the manufacturer offers a rebate AND 0% financing, there is no way your credit union can compete so, again the choice is clear. If you are still not sure about which decision is best for you,  visit the nearest branch or, call (800)-822-6875). We will be happy to run the numbers to help you determine which option is best. Plus, we will get you prequalified for that new car.