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Car incentives: Cash back vs. lower interest rate

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If you’re in the market to purchase a car, it’s important to first consider the financial factors and do the math—then make the right decision for you.

Giant stickers slapped on each car in the lot promise big savings for buyers. "Cash rebate!" and "Low interest rate!" are the ones that appear most often. Here's what they mean:

  • Cash Rebate: The car manufacturer gives you a one-time rebate usually deducted from your car’s purchase price. Rebate amounts vary, but they’re usually between $1,000 and $3,000.
  • Low Interest Rate: The dealer is offering an interest rate that is lower than the normal rates offered. You’ll accrue less interest over the life of the loan you use to finance your purchase. That means you’ll spend less than you would have paid with a high interest rate.

Car manufacturers usually only allow one deal per purchase. Sometimes you'll get to choose which offer to take. But keep in mind that while most buyers get some kind of financing, only those with excellent credit qualify for 0% financing. Consider the specifics to see if taking the low interest rate is a better option vs. taking the cash rebate.

Doing the math

Let’s take a look at an example. Say you’re buying a car that costs $23,500 and putting no money down. The dealership is offering either a 60-month loan with a $2,000 cash rebate and an interest rate of 2.19%, or that same 60-month loan with no rebate and a 0% interest rate.

If you choose the rebate, you’re borrowing $21,500 (purchase price minus the rebate). At 2.19%, your monthly payment will be around $378.

If you choose the financing, you’re borrowing the full $23,500, and your monthly payment will be around $391. Even though you’re not paying interest on the loan, because you’re borrowing more money in the first place, you end up spending more each month. Use our monthly payment calculator to determine your monthly payments.

To understand the difference between rebates and low-interest financing options, it helps to put yourself in the car manufacturer’s shoes. Rebates come right out of their pockets. But if a buyer goes for a 0% plan, the car manufacturer keeps more money up front.

Car manufacturers also know that most buyers pay off their loan before it matures. That’s why they usually prefer it when buyers choose the low-interest option instead of the rebate.

If your goal is to end up with the lowest monthly payment, the cash rebate is typically the better alternative. However, variables like how much money you put down, the total purchase price of the vehicle, any trade in values, your local sales tax rate and the length of the loan can affect the final payments. The longer the loan term, the lower the monthly payment.

The right choice for you depends on your priorities. Once you’re clear on what’s most important to you, use Bank of America’s auto loan and payment calculator tool to weigh your options. That way, you can make a smart financial decision and drive away happily.

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