Dealer Financing vs. Cash Rebates

Did you run these numbers before buying your last car?

If you are an impulse buyer, the answer is probably - no. If you are someone that gets all turned around with calculations, don't worry. We make this easy to figure out and it can save you thousands of dollars.

Before you begin, consider the following factors:

1. How long will you keep the vehicle?

2. Will you pay off the loan early?

3. How much will you be financing?

The answers to these questions will help you determine whether to accept the dealer financing offer or the dealer cash rebate. You will need to calculate the monthly car payments for each scenario to determine which will save you the most money.

We’ll use a real life example to illustrate the lower monthly car payment. If you haven’t already read Credit Report Tips and Auto Loans 101 , we recommend that you order your credit reports/scores and apply for an instant online auto loan before visiting a dealer. These will provide you with credit scores to determine if you qualify for Low APR Loans and the auto loan rates available from other banks based on your credit history.

ForThis Example: The new vehicle is a Chevy Tahoe and we have found a dealer that is offering this vehicle at $241 under invoice. The purchase price before incentives, taxes, and registration is $35,400. We are selling our current car for $10,000 and plan to pay the taxes and registration out of our pocket. We expect to pay off the Tahoe or sell it after two years.

Dealer Cash Incentive:
$2,000 cash rebate

Dealer Financing Options:
36 months      3.9%
48 months      4.9%
60 months      5.9%
72 months      6.9%

If you accept one of the dealer financing offers, you will be financing $25,400 ($35,400 minus $10,000 for your current car).

If you accept the dealer cash incentive offer, you will be financing $23,400 ($35,400 minus $10,000 for your current car and $2,000 dealer cash incentive).

Step One: Calculate Monthly Car Payments for Dealer Financing

Loan for $25,400
36 months     3.9%     $748.78
48 months     4.9%     $583.79
60 months     5.9%     $489.87
72 months     6.9%     $431.83

After submitting a couple of instant auto loan applications, we calculate the monthly car payments with the $2,000 cash rebate based on the rates offered from the other banks.

Step Two: Calculate Monthly Car Payments for Dealer Incentives

Loan for $23,400
36 months     5.89%     $710.71
48 months     6.05%     $550.09
60 months     6.05%     $452.93
72 months     6.59%     $394.36

We can see the lower monthly payment if you take the $2,000 cash incentive from the dealer and finance your vehicle through another bank, but let's see how much you will save over 2 years. You can simply multiple the monthly savings by 24 months. For example: We will be saving $38.07 each month on the 36 month auto loan ($748.78 minus $710.71). This will give us a savings of $913.68 over two years.

Step Three: Calculate the Monthly Car Payment Savings for Two Years

36 months     $913.68
48 months     $808.80
60 months     $886.56
72 months     $899.28

Now, you see that it makes sense to finance through another bank and accept the $2,000 cash rebate.

This is not always the case. The amount of the cash rebate, your credit history, and the amount financed can alter the outcome of these calculations. If your credit score is over 680, you will most likely qualify for the dealer financing and for loans, from companies like HSBC Auto Finance .

If you do not see a savings during Step Three, it will make more sense to accept the Low APR that the dealer is offering. By running these numbers ahead of time, you can arrange an Auto Loan online with a company like MyAutoLoan before you visit the dealership.

Not all new car buyers are going to qualify for the dealer financing offer. If you know you have "bad credit" (low credit score) and keep getting turned down for loans, it is unlikely that you will qualify for low APR dealer financing. However, applying with MyAutoLoan will save you a lot of time, headaches, and reduce the number of credit inquiries on your credit report. These companies offer loans to people with low credit scores.

Read more at Auto Loans 101 , Top 6 Car Loan Scams , and Credit Report Tips