💰 Cash Back or Low Interest Calculator

About Cash Back vs. Low Interest Offers

Auto manufacturers frequently offer either a cash back rebate or a low interest rate when you purchase a new vehicle. These two offers are usually mutually exclusive — you must choose one or the other. This calculator helps you determine which offer will save you more money based on your specific situation.

Cash Rebate

A vehicle cash rebate is an additional deduction on the purchase price of a car. The amounts generally range between a few hundred to a few thousand dollars. In some cases, the rebate is large enough to cover the entire down payment.

Aside from vehicle rebates available to any potential buyer, there can be special rebates such as those for people who served in the military, current students, or first-time buyers. It is also not uncommon for rebates to be given to returning customers trading in a same-make vehicle from previous years, or switching from a competitor's model, which is sometimes called a conquest incentive. Some dealers may require the financing of the auto loan for a car purchase to be done through a captive lender in order to qualify for a rebate.

Rebates may be distributed in several different ways. An instant rebate on a car is an immediate deduction off the negotiated price of the car. While it may be the ideal form because of its instantaneous application, some are in the form of a mail-in rebate from the manufacturer; they arrive as a check or prepaid credit card four to eight weeks later.

Buyers who plan on paying cash entirely upfront will only benefit from the cash rebate option. Because there is no financing involved in the purchase, it doesn't matter whether the interest rate is 0% or 10%.

Almost all vehicle cash rebates originate from car manufacturers rather than car dealers because their goal is to further incentivize potential buyers to buy cars, usually to get rid of old inventory or to jump-start sales for vehicles that aren't selling well. Rebates should not be confused with a dealer holdback, which is a portion of a vehicle's sales price (usually 2 to 3 percent of MSRP) that a dealer is allowed to "hold back" from manufacturers on a quarterly basis.

Low-Interest Financing

When car buyers receive more favorable interest rates than usual on their car purchases (direct from the dealer, not as a preapproval from an external source such as a bank), this is called low-interest financing. A car loan at a lower rate will require the car buyer to pay less in interest during the life of the loan. In some cases, the low rate only applies to a brief introductory period (such as for the first 12 months) as opposed to the entirety of the loan.

Similar to a cash rebate, low-interest financing reduces the total cost to own the car in the end. The lower a given rate, the more likely it is that it will reduce the cost of a car purchase more than a cash rebate. While cash rebates tend to be more widely available to everyone, low-interest financing is generally reserved for a select few. Normally, these car buyers (what car ads often refer to as "well-qualified buyers") must have excellent credit scores to qualify. In some cases, they must also make larger down payments to qualify.

Which One to Choose?

Both options reduce the total cost of owning a car in the end, just by different methods. Generally, it comes down to which amount is higher: the rebate amount or the total interest saved from the low introductory rate. Low introductory rates are very likely for car buyers with great credit history, but many times, vehicle rebates can be just as good from a financial standpoint.

Considerations

• Even when dealers offer their lowest interest rate financing, there is no guarantee that it is the best possible rate available to car buyers, especially if their credit scores are on the lower end. It can be helpful to shop around at external sources such as banks, credit unions, and online auto loan companies. Getting pre-approved before going to the dealer will give you a rate you can compare to their low-interest financing option.
• The average length of car loans is the longest they've ever been; it hasn't been uncommon to see loan terms offered in the range of 84 or even 90 months. This is generally due to several reasons; the first is to make relatively expensive cars more affordable for the average car buyer. By extending the life of the loan, the spread-out monthly payments appear smaller.
• The second is as an incentive for consumers to purchase new cars more often. While 0% financing is generally coupled with shorter terms, in some cases, it is possible to find longer terms with 0% financing. The problem is that it can potentially create a scenario where the car buyer owes more on loan than the worth of the car if the car ends up depreciating at a faster rate. This is called an underwater or upside-down loan.
• Keep in mind that no matter how favorable a rebate or interest rate may seem, it is only one part of the equation when trying to find the best deal possible out of a car purchase; just because a salesman concludes by offering a rebate does not mean that all other discounts are off the table. Rebates come from manufacturers, not the dealers. The final transaction price on a car is still negotiable unless stated otherwise.
• The calculator computes hard figures when arriving at the best financial choice between the two, but remember to consider other factors. As an example, it's probably better for someone with a poorer credit history to consider the cash rebate option if there is an immediate and expensive medical emergency that needs funding.

Beware of Bait-and-Switch

There is a strategy sometimes employed by salesmen called a bait-and-switch. Initially, customers are baited through advertisements of products at low prices or rates, only for them to learn that the actual deal is not all that was initially promised, or is gone. An example of a bait-and-switch is the advertisement in the newspaper for a sack of potatoes at a grocery store that sells for $2, but in actuality, the grocery store has "run out" of that deal and offers customers a competing brand for $5 instead.

The bait-and-switch strategy is commonly used by car salesmen. As one example, a TV commercial may advertise 0% financing at a local car dealer, but when potential customers visit it in person, they are apologetically informed that they don't qualify for 0%. The customer may be so keen on the car at this point that they settle for a higher rate anyway, and the dealer's bait-and-switch trick has worked as intended. Though it is illegal in most countries as a form of false advertisement, it is still practiced.

Tips for Getting the Best Deal

• Negotiate the price first: Always negotiate the out-the-door price of the car before discussing financing or rebates. This prevents the dealer from hiding costs in the financing.
• Get pre-approved: Have a pre-approved loan from your bank or credit union before visiting the dealer. This gives you a baseline to compare against the dealer's offer.
• Check your credit score: Knowing your credit score helps you understand which offers you qualify for and gives you negotiating power.
• Consider the total cost: Don't focus solely on the monthly payment. Look at the total cost of the vehicle including interest, taxes, and fees.
• Don't rush: Take your time to compare offers. Dealers may be more willing to negotiate at the end of the month or quarter when they're trying to meet sales targets.
• Read the fine print: Some low-interest offers may only apply to certain models, trim levels, or loan terms. Make sure you understand all the conditions.
• Consider the opportunity cost: If you take the cash back, you could invest it. If you take the low interest, you save on interest payments. Compare these two scenarios carefully.

Frequently Asked Questions

Can I get both the cash back and the low interest rate?

In most cases, no. These offers are typically mutually exclusive — you must choose one or the other. However, sometimes dealers offer a combination of a reduced cash back with a slightly reduced interest rate. Always ask about all available incentives.

Which offer is better for a shorter loan term?

For shorter loan terms (24-36 months), the cash back offer often wins because there's less time for interest to accumulate. The lower interest rate doesn't have as much time to generate savings.

Which offer is better for a longer loan term?

For longer loan terms (60-84 months), the low interest rate often wins because the interest savings compound over a longer period. A small difference in interest rates can add up to thousands of dollars over 6-7 years.

Does the down payment affect which offer is better?

Yes. A larger down payment reduces the loan amount, which reduces the total interest paid. This tends to favor the cash back offer because the absolute interest savings from a lower rate are smaller on a smaller loan.

What if I plan to pay off the loan early?

If you plan to pay off the loan early, the cash back offer becomes more attractive because you won't be paying interest for the full term. The low interest rate benefit is reduced when the loan is paid off quickly.

Is 0% financing always the best option?

Not necessarily. If the cash back offer is large enough, it can outweigh the savings from 0% financing, especially for shorter loan terms. Also, 0% financing sometimes comes with conditions like a shorter loan term or a higher purchase price.

How does sales tax affect the comparison?

In most states, sales tax is calculated on the purchase price before the cash back is applied. This means you pay tax on the full price regardless of which offer you choose. However, some states don't tax rebates, which can make the cash back offer more attractive.