When deciding between a zero percent interest rate offer or a cash-back offer, also known as a rebate, consider your total loan payback amount and monthly payment to determine the cheapest approach to car ownership. Several loan factors can affect your overall savings, such as a trade-in, down payment amount, loan term and approved interest rate.
Considerations
The difference between your monthly loan payment and your overall loan payback amount depends on the amount you finance, your interest rate and the loan term you choose. If you were to pursue a loan with little money down for a 60-month term or longer, the cash incentive savings are likely to prove similar to the alternative zero percent savings. If you decrease your loan amount by a down payment or trade-in, or intend to pay off your loan early, choosing the cash incentive is likely your cheapest option.
Budget
You may find that your monthly payment is too high if you choose to pursue the zero percent offer. A zero percent interest rate option usually involves term restrictions. For example, you may find the zero percent opportunity is only available for a term of 36 months. While it may seem like a great deal, a car payment for 36 months without a sizable down payment is much higher than you'd expect. An $18,000 loan financed for 36 months at zero percent costs $500 per month. An $18,000 vehicle with a $1,500 rebate that's financed for 60 months at 5.9 percent is only $318 per month. You may have to choose the cash incentive to comfortably afford your monthly loan payment.
Calculations
The best way to determine the cheapest route based on your budget, term, trade-in and down payment is to use an auto loan calculator. Edmunds.com offers one that figures sales tax and dealer fees based on your specific location (where you live can add thousands to your loan amount) Use the calculator to view the monthly payment differences between either of your options. Also, consider your long-term costs by reviewing your overall loan payback amount. Many auto loan providers do not penalize for an early loan payoff, so you may have the opportunity to avoid some of your interest payments if you intend to pay off your loan early.
Credit Considerations
Not everyone will qualify for a zero percent loan offer. You must use the manufacturer's bank and have good-to-excellent credit to obtain a loan approval. You may prequalify for the loan before going to the dealer by applying at the manufacturer's website or by calling a dealer to submit a credit application for a preapproval. If your loan is declined, you can use a co-signer to obtain your zero percent loan. Or, you may have to pursue the cash incentive and accept a higher interest rate.
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