Calculator: When a Rebate is Better than a Low-Rate Auto Loan

Shopping for a new car? If you're in the market and have decided to purchase rather than lease, you'll find several financing options. These days, more and more dealers are offering low-rate loans or cash-back rebates.

While it's nice to have choices, they can be downright confusing. And expensive. In the final analysis, you may be better off with conventional auto financing from your credit union.

"Hidden costs" in dealer financing options

• Dealers' low-rate loans and rebates almost always are available only on slower-selling models. These cars may have lower resale values.

• Dealers' low-rate loans can have bigger  prepayment penalties and can require bigger down payments.

• Dealer financing plans usually are limited to dealer stock. That means you may have to sacrifice the color, style, and/or options you want. Unwanted options can add 25% to 30% to the sticker price of your car.

So, don't be smitten by auto dealers' low-rate advertising—visit your credit union first to explore financing options.

Plan A

The low rates that most dealers advertise are for short-term loans. For example, one dealer offers 1.9% financing, but that's only available on two-year loans. A new $20,000 car with a $2,000 down payment (10% down) will require financing $18,000. This translates to an astounding $765 monthly payment—out of reach for most buyers.

The same dealer offers other options, which become less attractive as the loan term lengthens. The dealer's three-year loan has a 4.9% rate, while its four-year loan has a 5.9% rate, and its five-year loan has a 6.9% rate. Financing $18,000 on your $20,000 car at the dealer's 5.9% rate for four years results in a monthly payment of $422—a more realistic outlay for many consumers' budgets.

Plan B

On the other hand, if you choose the dealer's rebate plan, you forego the low-interest-rate loan, but get a $2,500 cash rebate. Adding the rebate to your down payment can make credit union financing very attractive—because the larger down payment reduces the amount you need to finance.

So which alternative is best—taking the dealer's low-rate loan or the credit union's loan with the dealer's cash-back offer? Use this calculator to find out. Fill in all six fields before you hit calculate.

Published June 9, 2003

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