0% financing or a rebate: Which is better?


0% financing vs. a rebate: which is better when buying a car? ‘Tis the season to buy a car and this pig has more to tell you about cars. Most people think that 0% financing sounds like a no-brainer. While 0% financing is fairly popular right now, it’s not always the best choice or even a choice for all buyers. What happens when the dealer also offers a rebate? Confused yet? Read on.

First off, it’s hard to qualify for the 0% financing. What those fancy commercials don’t tell you in their super-fast legal speak is typically, to receive the lowest rates, your credit score needs to be 680/B or above. C heck your credit report and get your credit score if you’re serious about buying a car. If you know you have a 720/A or higher credit score, you can negotiate from a better position.

And by the way, always negotiate the price of the car before you even think about mentioning a trade-in or financing. Another good tip – if you can find out the dealer cost for the car and go up from there, it’s a better deal than starting at the sticker price and going down. Trust me.

OK, so you do qualify for 0%. Goody for you. Can you afford the monthly payments with their terms? Frequently, a 0% offer is only for a 36-month term. So that seemingly affordable $27,000 car suddenly may not be so friendly to your monthly budget. Take a look.

  Dealer Loan       Credit Union Loan
Sales Price   $27,000       $27,000
Down Payment   $2,700       $2,700
APR*   0%       1.99%
Term   36-months       60-months (up to 72)
Monthly Payment       $675       $425
Interest Paid   $0       $1,249


I can hear you now…look at the interest paid! Yep, any loan that charges interest will have a higher cost over the life of the loan…unless you factor in a rebate. Rebates are also often offered through dealerships as an incentive to buy now or buy theirs (vs. another brand). Typically, it’s a “and/or” offer: you can choose 0% financing or the $5,000 rebate.

Most folks assume that the 0% financing is the better deal and skip the math. There are many calculators out there that quickly do the math for you. Edmunds.com has a great one that will clearly tell you to either take the 0% or take the money and run.

While the 0% is great for some, make sure it’s the best for you. Sometimes the cash is better, even if you’re paying interest on the loan. Think long-term savings. Even a $2,000 rebate saves $751 over the life of the loan in our scenario above. 

Car buying really is an exciting experience. This pig just loves talking about cars – buying cars, selling cars, driving cars…It’s fun to test drive cars and figure out which ones suits you best – for your needs and your money. Heck, go ahead and test drive that car that is WAY out of your price range. Can you say Porsche Boxster? I can…silver with a black top. Saaa-wwweeeet! Ahem, I digress. Like I was saying, go test drive that dream car, but leave it at that. March over and  go buy the car you can actually afford.

Make it enjoyable by being prepared. Before you walk into the dealer, know your credit score, bring a pre-approval from your FI (even better, get SECU’s  super easy Auto Check), negotiate the price of the vehicle (independent of financing) and then walk away.

What, you ask? Yes, walk away, go home, do the math again and sleep on it. The car will still be there tomorrow. And it might even have a lower price when you return…imagine that!

Here’s all the legal stuff we have to say. You can read it super-fast in your head if that makes you happy.

*APR = Annual Percentage Rate. 60 monthly payments of $15.73 per $1,000 borrowed. SECU rates as low as 1.99% APR for new auto loan; 2.24% for used auto loan. Rate reflects discount for a direct loan payment option from a SECU account. Your rate may vary based on term, application and credit history. Subject to credit approval. Rates are subject to change without prior notice. Other terms and conditions may apply. 


Flickr image courtesy of Tax Credits.

About the Author ()

Melvin is the Smart Green Pig. "Smart" as in intelligent. Some would say "Super Intelligent" or perhaps "Genius". But also "Smart" as in surly and sarcastic, so watch your Ps and Qs! By the way, Melvin gets paid (quite handsomely) by SECU, so even though he's completely unbiased, some might think otherwise. Just sayin' (disclosin').

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