Financing a new car can be a stressful ordeal.  You’re making a large purchase and at the same time the dealer may be offering several diverse financing options. You may find yourself asking – Which is the best financing option for me? Thankfully, we are here to help.

Two of the main financing option you will likely encounter during your car buying experience are cash rebates and 0% APR financing. Cash rebates offer upfront discounts on the purchase price of your vehicle, meaning that you will be financing a smaller amount.  On the other hand, 0% APR financing offers borrowers with good credit a loan with no interest charges.  Accepting a 0% APR financing offer will generally waive any rebate incentives, so the initial amount you are financing will be higher in comparison.  So the question remains - Which is the best financing option for me?  Let’s walk through an example:

  • New Car Price: $20,000
  • Available Rebate: $2,500
  • Annual Percentage Rate: 5.00%
  • Term: 60 months

Option 1 payment example: If you were to accept the rebate in the situation above, you would be financing $17,500 for 60 months at a 5.00% APR. The total cost of the loan would be $19,815, which includes $2,315 in interest paid. Your monthly payments would be $330.25.

Option 2 payment example:: If you were to accept a 0% APR financing offer, you would be financing the full $20,000 for 60 months at 0% APR.  Since you are not paying any interest, the total cost of this loan would be $20,000. Your monthly payments would be $333.33.

Even though you are paying interest in Option 1, it is still the less expensive option over the 5 year term of the loan. The monthly payment is $3.08 less if you accept the rebate, which will save you $185 over 60 months.

What if the rebate was reduced to $2,000?

Option 1 payment example: If you were to accept a $2,000 rebate in the situation above, you would be financing $18,000 for 60 months at 5.00% APR. The total cost of the loan would be $20,381, which includes $2,381 in interest paid. Your monthly payments would be $339.68.

Option 2 payment example:  There are no changes to the 0% APR financing offer. You would be financing the full $20,000 for 60 months at 0% APR.  The total cost of this loan remains $20,000 and your monthly payments would be $333.33.

In this scenario, it would be more beneficial to accept the 0% APR offer.  The monthly payment is $6.35 less, which will save you $381 over the life of the loan.

When presented with these offers, it is always best to determine which option is best for you.  Thankfully there are tools like our Car Loan Calculator that can help you decide for yourself.  Other factors may influence this decision, including credit approval and terms/conditions of any offer. Be sure to review your loan offer thoroughly before committing to your new purchase.