To determine whether you should take a cash-back incentive or zero-percent loan, calculate your overall cost for either option. Often, the amount of money you can save is very similar. Consider your long-term cost, whether you can pay off your loan early and negotiating at the dealership to save more money.
Long-Term Calculation
To fully gauge the long term benefits of your car loan options, use an auto loan calculator to view your long-term savings. Edmunds.com offers a variety of calculators to help determine overall loan payback cost, including your tax, fees and interest rate. Obtain a pre-approval from a lender of your choice so you know your interest rate, which can make a difference of thousands of dollars over the term of your loan. Enter the vehicle's price into the calculator, include a trade value if applicable, and view your overall cost for the zero-percent option. Do the same to view your rebate option, using your pre-approved interest rate.
Approval Considerations
Zero-percent financing is offered to buyers with good to excellent credit. Poor-credit customers may not be able to take advantage of zero-percent offers. Also, banks determine loan value based upon a borrower's debt-to-income ratio, so you can find that you're declined for the total loan amount, despite having good credit. Your total monthly debts are accessible on your credit report and proof of income is required. Therefore, if you make $5,000 per month but pay out $4,500 in debt, you are likely to be declined for a zero-percent loan if the offer is only for a 36-month term. Loan terms vary for zero-percent offers.
Negotiations
If you agree to take the cash rebate or zero-percent financing, the dealer makes full profit on your vehicle's sale. The vehicle's manufacturer, which offers incentive options, reimburses the dealer for either option. To save more money, negotiate your new-car pricing the same as you would for a used car. If you are choosing a rebate and regular rates, expect to save about $20 per month for every $1,000 you negotiate off your vehicle's price.
Budgeting
Use an auto loan calculator to determine if the zero-percent option suits your budget. Many manufacturers consistently offer zero-percent for shorter loan terms, such as a 36-month term. Rebates, the alternative option, are likely offered no matter how long of a term you choose. A 36-month finance at zero-percent for a $25,000 vehicle costs $694 per month, a payment that may not prove an affordable option. If the manufacturer offers zero-percent for 60 months instead, the same vehicle costs $417 per month. Without a hefty down payment, you may not even want the zero-percent option because of the high payment.
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