Cash Back vs. Low APR Financing (Car Buying Tips)

When I sold cars, people kept asking me, "What's better, the cash back rebate or the low APR financing?" I hate to say it, but the answer really is, "It depends." First of all, it depends on whether you are eligible. If your credit scores is near 700 then you might be eligible. Most people are not, but suppose you are. If you are eligible, then it depends on whether the savings on the lower interest rate can offset the foregone rebate. What is better, the cash back rebate or the low APR?

A Case Study (The 2006 Chrysler Sebring 2-Door Convertible)
Today is October 4, 2006. The current promotion on the Chrysler Sebring gives the buyer a choice between a $2,500 cash rebate or low APR financing of 4.9%, according to Edmunds. The national average car loan is 6.93%. Is it better take the $2,500 rebate and finance at 6.93% or is it better not to take the rebate and finance at 4.9%. Suppose we could buy this car for $27,000 which is slightly more than invoice. Finally, assume that tax, titles and other fees are $300, sales tax is 6%, there is no down payment and no trade-in. In this example, rebates are taken after sales tax is considered.

Car Loan Calculator Will Solve This Problem
I used The Car Buying Bible's car loan calculator to compile the table below. For each scenario (24, 36, 48 and 60 months), it was a better deal to take the $2,500 rebate with the higher interest rate. If you look at the column for 60 Months, you will see that you give up a $2,500 rebate in order to save $1,171 in interest. That is hardly a good deal by any standard. The total cost of the low APR offer is (what you borrow plus interest) is $32,665.80. The total cost for the rebate offer is $31,336.80. Therefore, the low APR offer has cost $1,329.00 more.

	24 months	36 months	48 months	60 months
Amount Financed 4.9%APR	$28,920	$28,920	$28,920	$28,920
Amount Financed 6.93%APR & $2,500 rebate	$26,420	$26,420	$26,420	$26,420
Amount Financed Difference	$2,500	$2,500	$2,500	$2,500
Monthly Payment 4.9%APR	$1,267.47	$865.46	$664.70	$544.43
Monthly Payment 6.93%APR & $2,500 rebate	$1,182.05	$814.93	$631.80	$522.28
Monthly Payment Difference	$85.42	$50.53	$32.90	$22.15
Total Interest Paid 4.9%APR	$1,499.28	$2,236.56	$2,985.60	$3,745.80
Total Interest Paid 6.93%APR & $2,500 rebate	$1,949.20	$2,917.48	$3,906.40	$4,916.80
Total Interest Paid Difference	($449.92)	($680.92)	($920.80)	($1,171.00)
Total Cost of Loan 4.9%APR	$30,419.28	$31,156.56	$31,905.60	$32,665.80
Total Cost of Loan 6.93%APR & $2,500 rebate	$28,369.20	$29,337.48	$30,326.40	$31,336.80
Total Cost of Loan Difference	$2,050.08	$1,819.08	$1,579.20	$1,329.00

I'm sure there are cases where it's better to take the low APR, but here, the rebate was a better deal. To know for sure, use a car loan calculator to find out.

Written by a former car salesman, college math instructor, health insurance analyst and the author of The Car Buying Bible. This 162-page car buying guide is full of great car buying tips and offers the best car loan calculator around.