Auto Loans: Rebates & Incentives
There are different types of automobile rebates and incentives that can save you money when purchasing a new car. One type of rebate is a factory-to-customer auto rebate, wherein rebates are paid directly from the car manufacturer, or you can have the car dealer apply the rebate to the purchase price of the car, further reducing the price of the car.
In contrast, a factory-to-dealer incentive payment, sometimes referred to as an auto "dealer rebate," is money the factory gives the car dealer for each car sold. The car dealer can use the money for advertising, employee bonuses, extra profit, or many other purposes, or the automobile dealer can pass this money along to the car buyer as a price reduction. One of the purposes of the bidding process when someone is buying a car is to use competition to encourage automobile dealers to give this incentive money, which sometimes is $500, $1,000, $2,000, or even more to the car buyer as a price reduction.
Automobile manufacturers usually have their own auto loan financing plans as an alternative to customer cash rebates. Whether the car purchase financing plan is a better deal than the cash rebate depends on the size of the rebate, the car manufacturer-offered annual percentage rate (APR), the APRs available from other auto loan lenders, the amount the car buyer will be borrowing, and how long a period the car buyer will be borrowing for.
There are some quick, albeit rough, calculations you can make to quickly determine if the cash rebate or reduced interest rate is the better deal when you buy a new car. These are as follows:
- On a 60-month (5 year) loan, each percentage point you cut your APR is the equivalent of a car price discount of about $19.00 per $1,000 of loan.
- On a 48-month (4 year) loan, each percentage point you cut your APR is the equivalent of a car price discount of about $17.00 per $1,000 of loan.
- On a 36-month (3 year) loan, each percentage point you cut your APR is the equivalent of a car price discount of about $14.00 per $1,000 of loan.
To illustrate, assume one could get a $13,000, 48-month loan from a bank at a 10 percent APR, and that the special manufacturer offered plan's rate is 5.9 percent. The savings from using the factory plan would be estimated as follows: (10 minus 5.9) times 13 times $17.00 = $906. If the offered rebate is $2,000, then taking the rebate would be a much better deal.
A general rule of thumb is that, in most circumstances, it is better to take the cash rebate and obtain auto loan financing with whomever will give you the lowest rate, be it your bank, credit union or the car dealership. Car buyers should also raise their credit scores as much as possible to qualify for the lowest interest rate and avoid paying $2,000 to $4,000 in finance charges in unnecessary finance charges.
However, another general rule of thumb is that the more you borrow, the more likely it is that the reduced interest rate will be a better deal than the rebate.
To illustrate the latter rule of thumb, the same terms as those mentioned in the above paragraph will be used, except the buyer plans to borrow $33,000. By taking the reduced interest rate, he would save roughly $2,300 [(10 - 5.9) x 33 x $17.00], which is more than the $2,000 rebate offered.
Should you take the rebate in cash or add it to the down payment?
Most car buyers are tempted to take the cash rebate, but maybe you shouldn't. You can save money by applying the rebate to the down payment. How much? To illustrate this, assume you're planning to purchase a $22,000 car with a 4 year (48 month) term loan at 8%: