Battle Royale! Low Car loan APR Vs. Cash Back?
0% financing is back and so are generous cash back offers. Knowing which one to take can save you money in the long run! Here is how to do it!
Some key questions to ask yourself:
1. How much can you afford each month or how much do you want to spend?
2. What is your credit score?
3. How long do you typically drive your cars?
Ok, with those out the way and saved for later lets do some comparing. Take a look at the Chevy Silverado which currently has $3,000 cash back, 0% apr for 60 months, or 1.9% apr for 72 months. Three great offers (offers found via edmunds.com). We will base the compare on the truck costing $25,000.
First calculate your payments and total cost of the car. If you don’t know how to calculate loan payments you can download our free loan tool for excel found in the left margin or use this quick and easy tool at Bankrate.com.
APR Amount Payment
0% $25,000 $416.67 (not including tax and fees) (60-months)
1.9% $25,000 $367.66 (not including tax and fees) (72-months)
Total Cost of car using 0% APR loan: $25,000 +tax and fees
Total Cost of car using 1.9% APR loan: $26,471.52 +tax and fees
Now for the hard part:
If you want to take the cash offer you will not get the special financing and be subjected to normal car loan rates. This also implies that your special car financing comes at a cost of $3,000. Your rate will be dependent on the bank offers and your credit score. The best advice here is to do research to see what banks are giving to average car loans from sites like Bankrate , Lending Tree, or Eloans. With great credit you should do better than the average and with poor credit you will do worse than the average.
Now, calculate your cost of the car based on a few interest rates and compare.
APR Amount (less rebate) Payment Total Cost of Car
5% $22,000 $413. $24,806.67 (not including tax and fees)
6% $22,000 $423.21 $25,392.34 (not including tax and fees)
In this example, for a 60-month loan with no down payment, you should take the rebate if you your interest rate is below 5%.
Alternative method is to calculate what the $3,000 equates to as an interest rate on a 60-month loan for $22,000. If you do your math correct you should get 5.3%. If your loan is better than 5.3% take it, otherwise go with the 0% apr.
Factors such as putting money down or adding accessories impact the results. If you put money down, you are going to pay less interest. For example, if you put $5,000 down on the 6% loan your total cost of the car is now $24,621 making it a better deal. However, you sacrifice $5,000 of cash which is a whole other topic.
Fees and other accessories also add to the price of the car, make sure to add them in when doing your compare.
Remember the questions up top? They now come into play. One method may be better, but if you can’t afford the payment then you will need to go with a different option. If you have done your homework, you will know how much the option costs you.
The other important question above is your credit score. Many of the good APR offers don’t apply with poor credit, so taking the cash rebate is a better deal.
For the last question, how long do you normally own a car? The longer you stretch out your loan the more likely it will become upside down (same holds for interest, the more you pay the less principle you apply on a monthly basis). If you know you flip cars every three years, consider taking a shorter loan or at least an option that puts your principle after three years close to the estimated value of the car (hint you will need an amortization schedule to figure that one out).
Happy car shopping! Finding you better deals!