Say you live in New York, and the rising cost of oil has you eyeing a more fuel-efficient ride costing $20,000.
The average rate on auto loans in the Empire State is about 6.66%, and your local dealer is offering a choice between 1.9% financing on a 48-month loan or $2,000 in cash. To get the dealer incentives, you'll have to put $1,500 down.
Assuming you don't have a trade-in, choosing the cash rebate would save you $404 more over the life of the loan than taking the low-interest loan. You'll pay a lot more interest by going this route -- $1,755 more in total, assuming you don't refinance or make any prepayments.
Since taking the cash rebate reduced your loan amount by $2,000, you've reduced the amount of your principal payments -- and your total cost for the car -- significantly. If your rebate was just a little bit lower ($1,500 instead of $2,000, for example) then refinancing would be the better choice, with savings of $212.
Taking the rebate is often the better decision, since you must hold a relatively long-term loan in order to see the benefits of low-interest financing. That's why dealers tend to offer incrementally higher rates for longer-term loans: While you may be able to get 1.9% financing on a 48-month loan, the rate may be closer to 2.5% or 3% on a 60-month loan.
The difference in savings between low-interest financing and a rebate can be just a couple hundred dollars. By calculating your savings beforehand with the help of the online calculator, you'll be sure to make the right decision.
