Should I choose the rebate or take the special financing? Making the right choice can save you $$$

Should I choose the rebate or take the special financing? Making the right choice can save you $$$

Hello again loyal Beaverton Readers! Once again, thank you to the 13 folks who reached out to me needing help in the last few weeks. I appreciate you putting your trust in me and I’m very happy to help.

Should I purchase with the rebate or take the special financing?

Here is a comparison of the two in order to provide a better idea of which option is better. There is math involved but there are also special calculators that can take this headache away.

In most cases, dealers use their manufacturer’s financial institution to finance new cars. These institutions are responsible for generating all the low interest ads you see on television or in the newspaper. You have probably seen these ads that say something like:

  • 0% APR for 72 months!
  • or 0.9% percent on select vehicles!

If you look at the small print, you usually see a low APR (annual percentage rate) or cash back. For example, if you see 0.0% or $1000 cash back on all select models, this means that you have two choices:

  • You can opt to go with the low interest rate, or
  • You can get a discount in the form of $1000 cash back if you pay cash or take a loan out with a bank.

In any case, you do not get both!

When to use manufacturer financing rates and when to use your bank.

Let’s assume that you are buying a car that offers 2.8 percent financing or $2,000 cash back. The vehicle price is $20,000 and, in this example, since we’re in Oregon, there is NO tax!

Because there is $2,000 cash back, you will have to add that to the total loan for a total of $22,000 financed with the manufacturer at the dealership. If you spread this out over 48 months at 2.8%, it gives you a payment of $485.01 per month.

Now, if you took the cash back and then went to your bank and financed the car, you would save the $2,000 on the selling price but your interest rate is higher, perhaps around 7%. In this case, you would have $20,000 financed for 48 months at 7%, giving you a payment of $478.92 per month. Notice it is only a $6.97 per month difference and that going through the bank at 7% is in fact cheaper!

How can a 2.8% interest loan and a 7% interest loan be only $6.97 per month difference in payment?

Let’s look at the cost of borrowing to determine what is happening.

On the 7% bank loan, the amount financed was $20,000 and the total interest you would pay over 48 months is $2,988.16.

On the 2.8% dealership loan, the interest you would pay is $1,280.48. Add in the $2,000 you didn’t take and your total is now $3,280.48.

Bottom line is that the difference between financing at the dealership vs. the bank is $292.32 in favor of the the 7% bank loan!

To better understand this situation and get the best loan, you have to determine the break-even rate of the loan and shop that amount. The break-even rate is the normal interest rate that matches your payment on the low dealership financing. For example, the following two loans have completely different interest rates yet their payment is the same.

  • Loan One: 2.8% financing on $20k plus $2000 Rebate for a total of $22k. Over 48-month term = $485.01 per month payment
  • Loan two: 7.65% financing on $20k over a 48-month term = $485.01 per month payment

Notice that the payment of $485.01 per month is the same at 2.8% and 7.65% because of the $2000 increase in the price of car when we chose to take the low 2.8% interest rate over the $2000 rebate.

This means that for the car above, your break-even Interest rate is 7.65%. Now contact your bank or lending institution and see if they will beat that 7.65% rate. If they do, you will save money! (Note that the low rates used by the dealers are fixed rates that do not fluctuate with interest rates. Make sure you are getting a quote on a fixed rate of interest and not a variable rate that floats up and down as interest rates change. You have to compare apples to apples.)

An easy way to determine your break-even rate of interest:

Step one is to determine the exact payment of a car loan at the manufacturer’s low interest special. To do this, you need to get the exact price on the road with all your taxes minus any down payment. Take the lump sum of the loan and figure out the payment at the special interest rate using an advanced loan calculator. This gives you payment one. You can use a Low APR Interest VS Rebate calculator to make this easy.

Next, you need to determine the price on the road of a vehicle that has no rebates or add-ons to the price (in other words, a cash price). With this amount, you need to work backwards to figure out what interest rate would give you the same payment as the low interest rate payment the dealer is using. You need to roll back your payment in the calculator to interest.

Keep in mind manufacturer financing is usually far better than your bank, or credit union in most cases.

Pre-approved car loans and closing thoughts

Lastly, we never recommend that you get preapproved for a vehicle loan. The reason is the lender has no specific value to base the loan on, so it is best to wait until you have chosen the vehicle.

Food for thought here just because there is a rebate on a vehicle does not mean we cannot negotiate the price way down in order to get the best deal possible.

Thank You all for reading we appreciate the outpouring of calls and emails.

If anyone is looking for a new or pre-owned vehicle of any kind, that is what I do. I can save you time and money, not to mention the heartache of doing all the above calculations!

Got an automotive question? Please feel free to email me at or call (503) 930-1493.