I think the toughest part about buying a new car is selecting a model. When I searched for my most recent car, it took me months to figure out which one I wanted. I even feel like I settled on my Chevy Malibu because I was just tired of shopping. Whatever car you end up selecting, there comes a time when you have to choose between the cash rebate and the super low financing rate (typically 0%).
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Cash rebates are exactly what they sound like. Many automotive companies offer cash back when you purchase one of their new cars. If you see a commercial for a new car that offers $2,000 cash back, you can expect at least $2,000 off the MSRP. There are several types of rebates so make sure you know about all of them. You can get rebates for being a recent graduate, being in the military, etc. Make sure you negotiate the lowest price before mentioning any rebates. This will ensure you receive the best deal possible. You can find a list of current rebates at this site.
Many companies also offer the chance to get great financing rates through their company. Many companies, especially right now, offer 0% financing for a couple of years. Even if they do not offer 0% rates, they usually still offer rates lower than you can get through traditional banks.
Which Offer to Choose
Now comes the part where you need to figure out which one to choose. Here are the options which you will need to pick from:
1. Pay Cash for the Whole Car
In this case you should obviously take the cash rebates. You should also be proud of the fact that you will own the car free and clear. Congratulations!
2. Take the Cash Rebate and Finance the Car at an Outside Bank
With this option, you need to figure out if the amount of the rebate will be greater than the amount of the interest expense of the outside loan. For example, let’s say you need to borrow $15,000 for the new car and you can get a 60 month loan at your credit union at 5%. Over the term of the loan you will pay $1,984 in interest. So for this example, if the rebates are greater than $1,984 you should take the rebate and finance it at the outside bank. You can search for auto loan rates in your area at Bankrate.com. Also consider joining a credit union. They always seem to have great rates. You can use the spreadsheet at the end of this post to calculate the interest expense. It will also tell you which option to choose.
3. Pass on the Cash Rebate and Finance the Car at the Special 0% Rate
If the rebates are smaller than the interest expense you calculated for #2 (using the spreadsheet at the end of this post), you should use the 0% financing (assuming you qualify).
I should note that many companies are offering cash rebates PLUS 0% financing right now due to the economy. If that is the case, you should obviously take both.
Spreadsheet to Help You Choose
Use the following spreadsheet to help you choose the best option for you. Be sure to read the comments in the spreadsheet so you get all of the numbers in the right spot. Enjoy!