One of the best ways to save money on your new car or truck purchase is to take advantage of manufacturer incentives. During certain times of the year, car makers will offer deals like 0% financing for 60 months or $2,500 cash back. Sometimes the manufacturer offers both options, but many times it’s pick one or the other.
Which one is the better deal? To help answer that, we are going to buy a fictional car. The average transaction price on a new car is approximately $31,000. We are going to compare a new $31,000 final selling price before either 0% interest for 60 months or $2500 cash back.
Depending on the actual deal, the numbers may sway you one way or another, but we’ll show you how you can figure it out for yourself easily.
When you borrow money with a 0% APR that means you do not have to pay a single penny interest on that loan. While it’s not technically free money, you are borrowing the money for free.
If you take the cash, that reduces the amount you are borrowing by $2,500 to $28,500. A good interest rate for a five year loan is 3.9%. According to the loan calculator on Bankrate.com, you will end up paying $2,915 in interest. It will cost you $415 more to take the cash discount than to take the 0% interest.
VIEW: 3.9% Amortization Table
It won’t seem like you’re saving money. Your monthly payments on the $31,000 at 0% APR will be $569.51. The same payments on $28,500 is $523.59. In some cases, the lowest monthly payment doesn’t save you the most money.
There are some people out there who do not look at financing at all. They pay cash up front for the car and leave without a car payment. While not being in debt sounds like a great plan, the 0% interest rate might be a better plan.
By taking the 0% and investing the $31,000, the buyer will make more money during the 60 months of the loan than they will pay in interest. Depending on the type of investment, that could be up to several thousand dollars.
0% interest rate loans often require a stellar credit history. If you don’t have established credit or your credit score is low, then you won’t qualify for a 0% loan. If that’s the case, the cash discount could be the better deal.
If you want to calculate yourself how much interest you’ll pay on any auto loan, click here to open the Bankrate.com Auto Loan Calculator.
By filling out the fields at the top of the page, it will calculate how much your monthly car payment will be. If you click the “Show/Recalculate Amortization Table” button below that, it will show you each month’s payment and how it affects the loan. If you add up all payments in the interest column, you’ll know how much you’ll pay in total interest costs.
Financing and special cash incentives are just part of the overall car buying process. Manufacturer incentives, such as a good interest rate, might not be as good as what other banks will offer you. It’s a good idea to shop around for car loan rates before going to the dealership. Also, we recommend seeing what banks the dealerships work with, and seeing what deals they offer.
In the past, we have been able to get a good interest rate from one of the dealer’s banks and the cash back from the manufacturer. It’s important to be working with a salesperson that you are comfortable with. That might not always be your closest dealership.
Having the right information when buying a new car will help you save the most money and get a good deal. When it comes to whether taking the interest rate or the cash back, we hope that you have a better idea of what you need to know and how to answer that question for yourself.