It sounds odd, but paying a higher interest rate on a car and taking advantage of the manufacturer’s rebate can save you money on both your monthly payment and the overall cost of an auto loan.
Here’s how it works. New car dealers regularly offer a variety of incentive programs to entice you to purchase a new car. The two most common incentives are the cash rebate and low interest rates when financed through the manufacturer. The lower interest rate sounds like a great deal, but when compared to taking the cash rebate, that low rate can cost you thousands over the life of the loan.
Here is an example:
A dealership offers you the choice of a $2,000 cash allowance (rebate) or 3.9% interest for 60 months when financing through the manufacturer on a car that cost $25,000. The loan offer sounds great compared to a bank offering 5.75% interest for 60 months, but if you break down both of the offers, here are the results. The car company loan would make for monthly payments of $464.71 for 5 years, for a total of $27,882.32. If you were to take the cash allowance and finance at the bank’s higher interest rate of 5.75% , your payments would be only $447.65 per month for 5 years, with total payments equaling $26,859.31. That means your monthly payments are almost $20 less per month, and over a 5-year period you have saved yourself more than $1,000. This is only one example; depending on the type of vehicle you purchase, your savings could be even more.
If you are in the market for a new car or truck, it pays to take your time and go over all of your options before making a decision. Before signing any papers, have your salesperson print out all of the options and take them to your bank. Your banker will be happy to look at the offer and help you decide what is in your best interest.
