Zero or Low Interest Financing vs. Auto Rebates

Which Should You Choose?

Use this calculator to help you determine whether you should take advantage of low interest financing or a manufacturer allowance. A rebate will reduce your loan balance, while low interest financing lowers your payments. The best option depends on the price of the vehicle, the size of the refund and the rates available for financing.

Rebates vs Interest Free Loans: What You Need to Know

Automobile manufacturers & dealers offer their customers allowances that lower the cost of the vehicle. A rebate is one way to save money on a car purchase, but people also have the option of a low APR. Discovering which one will be most advantageous will require that people examine each individually.

Dealers are advertising zero percent or low rates to new customers. However, these deals are not available to everyone. In order to qualify, people must have the best credit histories and scores. If not, they will be charged average or high rates. If buyers are not in a position to be able to qualify for the most advantageous APR, there is one other way that they can receive a lower rate.

How Much of a Down Payment Is Required to Receive a Low Rate?

Obtaining the best rates means that buyers will need to plan to offer at least 20 percent of the purchase price as a down payment. 20 to 30 percent down decreases the lenders' risk, and they see that the owner has a vested interest in paying. This belief encourages lenders to lower their clients' APR, and this means that people may receive a reduction of about 0.5 percent.

A lower rate with more money down will mean that people will have lower monthly costs. They will pay less over the length of the loan, and they will need less time to pay in full. For example, the current average APR for a 48-month auto loan is equal to 6.013%. In this example, the buyer offers 10% down, equal to $2,000. The monthly payment would be $422.81. The total amount of interest over the length of the loan would be $2,294.88.

Another buyer offers 20 percent down, equal to $4,000. This lowers the monthly payments to $375.83. The total amount of interest over two years would be $2,039.84. By putting 20% down, the second buyer pays $46.98 less every month.

Decreasing Costs by Accepting a Rebate

The other option people have is to accept a refund. Unlike low rates, people do not have to meet qualifications for general allowances. Discounts for special groups such as the military exist, but consumers will need to meet requirements for these deals. When people have the option of taking a manufacturer's rebate, they may find that the terms will be better with this choice than if they accepted a low APR from a financier.

The price deduction may call for a four-year term length on a $25,000 loan. This discount will reduce the principal by $2,500 so that the buyer only needs to borrow $22,500. Rather than spending $520 at zero APR or $541 at 1.9 percent interest on $25,000, buyers who accept the rebate will spend $414 a month with a 4% APR or $424 with a 5% APR for five years. The rate is higher in this example, but the monthly payments are much lower. If the amount of money that people will need to spend every month is of the highest concern, they may wish to accept the manufacturer's rebate over the lower APR.

Sources of Funding for the Best Rates

People have heard horror stories of how dealerships offer financing options that are advantageous to them and the lenders but not to the buyers. This scenario is not necessarily going to be the case with every dealer. Some dealers present their clients with very good options, including a 0% APR. If they cannot arrange a 0% APR, they may be able to match rates offered by other lending sources.

People shy away from dealership financing because they know that the dealers profit from lending. Dealers receive excellent terms from lenders, and they will charge the customer a little more to obtain a profit, but the base rate is so cheap in the first place that the increase in price does not necessarily make it more expensive than financing your auto purchase directly through a bank. This means that the dealer is not necessarily going to have the highest APR, but people will need to look at other options to make sure that they are receiving fair APR.

A Credit Union

A credit union is an excellent place to seek an auto loan, as rates from a credit union may be in the three percent range while a bank may be in the four or five percent range. However, people must not assume that a credit union is going to be the only place where they will receive the best deals. It pays to shop around. Sometimes banks or dealers may have great deals, especially if you have a strong credit score.

The Consumers' Own Banks

A bank with which people have had a relationship for many years is very aware of the clients' financial history. If the history is very good, the bank will be amenable to offering competitive terms. Banks would rather offer their customers more of their products than seek new customers because they have a steady pool of people to whom they can advertise.

The Best Term Length for an Auto Loan

The length of a loan has a lot to do with how much people spend on their new vehicles. Of course, they will want the term to be as short as they can afford. With a short term length, they will pay less interest, and this makes borrowing cheaper. They also need to consider the fact that it can be very easy for them to be underwater, meaning they owe more on the car than it is worth.

Why Being Underwater Is a Negative

The above-mentioned problem exists right from the beginning. After people drive their vehicles off the dealers' lots, they have lost about 20 to 30 percent of the cars' value. If the buyer obtained a $20,000 loan and only offered 10% down, they would owe $18,000 on a vehicle that is only worth $16,000. If they get into an accident and the vehicle is totaled, the auto insurance company will only offer them the fair market value, and that would be $16,000. In this case, they will owe $2,000 to the lender.

To prevent the above scenario from occurring, people can purchase GAP insurance that would cover the difference between what is owed and the fair market value, but this will increase the cost of their auto insurance coverage. However, they may not have a choice in this matter because the lender may require that they purchase GAP insurance in order to qualify for financing.

The Benefits of a Short Term Length

A vehicle can be underwater if the loan is too long. A lot of Americans have been financing over five years or longer recently. They opt to have terms this long as a way of dropping their monthly outlay, but this makes them vulnerable to owing more than the vehicle is worth and spending more on interest. To avoid being underwater, the best term length is a time period shorter than the buyer expects to keep the car. By doing this, the obligation will be paid in full before the owner trades the vehicle in or sells it.

If buyers can afford to make higher monthly payments, a term length of three years will qualify them for a lower APR so that they can pay less interest. However, people must make sure that they can afford to make these payments before they sign the contract. If they are unsure of their income or they need lower payments, a longer term length of five or six years will make the vehicles affordable, but they will pay higher interest.

Credit Reports

When to Check Credit Reports

Consumers may believe that they are doing things in the right order when they consider purchasing a new vehicle, but they are often leaving a very important step until the very end. They know how much they can afford to spend on a new vehicle. They know the make and model of the car they wish to purchase, and they may have even taken it for a test drive. After all this has been done, it is much too late for them to check their credit reports. They need to do this after they have determined how much they can afford to spend.

The dealer or outside lender is going to ask to perform a credit check. The buyer needs to know what the dealer is going to learn from these reports before the dealer has a chance to find out. Some of the information written in these reports may be inaccurate. If this is the case and the inaccurate information is lowering their score, the lender will have to charge a higher APR.

The best time for people to check is at least three months before they apply to borrow. If they need to dispute negative items that are bringing their scores down, they will need this amount of time to have these items removed if they are in error. As was mentioned above, a higher APR increases the cost of borrowing, so people will want to do everything they can to qualify for the best possible rates.

What to Look for on a Credit Report

Lenders will obtain credit reports from the three major credit bureaus TransUnion, Experian and Equifax, and consumers are entitled to receive one free copy of these reports every year. However, these reports contain the consumers' credit history only. To learn their FICO scores, they will need to obtain them from another source, such as When reading their reports, people will need to look for the following items:

  • Accounts that are not in their names
  • Accounts that were closed but are being reported as open
  • Resolved billing disputes that are still being reported
  • Inaccurate balances on debts
  • Credit limits that are incorrect
  • Old information that should no longer be reported

If people find anything on their reports that they believe is in error, they can ask the entity reporting this information to support its accuracy. If the lenders cannot do this, they must cease reporting the erroneous data. After determining that the report is in error, the bureau will be required to remove the information from the consumers' credit reports.

How Can People Dispute Erroneously Reported Items?

To begin this process, they will need to send a dispute letter to the bureau. They will send their letters by way of certified mail along with copies of documents that support their claims. Highlighting the disputed items on a copy of the report clearly illuminate what they are disputing. They will need to explain why they are disputing this information and ask that the item be removed or corrected.

The bureau will have 30 days to investigate the matter and will send all relevant materials to the creditors who are reporting the information in question. The creditors will then investigate the matter and report back to the bureaus. In the event that the creditors agree that the information is inaccurate, they will be required to report this fact to all three bureaus so that all three reports can be updated.

The bureaus will take the next step and send a letter outlining the steps that have been taken to rectify the errors if they will be removing or changing the items in any way. They will also receive another free copy of their reports.

Why Is the FICO Score Important?

The FICO score, ranging from around 300 to 900, is very important to lenders for assessing risk. Those who have high scores have a history of paying their bills on time. They, most likely, do not have any bankruptcies, foreclosures, short sales, defaults or late payments on their reports. This demonstrates to lenders that they are very good risks and are unlikely to default. They will be offered a better APR when they are approved.

If people's FICO scores are in the moderate to poor range, lenders will raise the APR. When people know that they have bad scores and a troubled financial history, they will need to make sure that they shop around for the best rate. One lender may only accept applicants with a score above 710, but other lenders may be willing to lend to someone with worse scores without charging the highest interest rates.

What Not to Do When Negotiating with the Dealer

Shoppers can receive a great purchase price for their next vehicles, but those who do not prepare to negotiate knowledgeably with the lender may end up spending more. Even though it's smart to know how much they can fit into their budgets every month, this is information that is not for the dealer's ears. If the dealer knows the amount they are willing to spend, it will eliminate the need to negotiate a better purchase price.

Furthermore, dealers know by how much they can increase the APR or add other charges because they have already agreed to spend a pre-determined price. Rather than discuss monthly payments, they need to discuss every option one at a time.

Not Obtaining Their Credit Reports before Going to the Dealership

Not knowing their FICO scores would mean that the dealer can tell car buyers that their scores are worse than they are. This would benefit the dealers because they can charge more if the clients' FICO scores are poor.

Not Seeking Pre-Approval for an Auto Loan

Buyers have the option of shopping around even if they are going to accept financing from the dealership. When they have been pre-approved, they will know before they show up at the lot what APR they can qualify to receive. With this proof in their hands, the dealer will be unable to convince them to accept a higher rate.

Allowing Negative Equity to Be Rolled Over

As was discussed above, some people owe more on their vehicles than they are worth. When they need to trade their vehicles in while they are underwater, the dealer may suggest that the amount owed on the loan, called the “negative equity,” be added to the current loan. This action will have the effect of increasing the new vehicle's purchase price.

The result of adding negative equity is that people increase the principal, and this increases the amount of interest they will pay. Furthermore, it's very likely that they will have the same amount of negative equity to contend with again when they are ready to trade in the vehicle they are purchasing now. Consumers must not agree to this option.

Adding the Cost of Add-Ons to the Loan

Dealerships sell extended warranties and other features that can be purchased elsewhere for less. If buyers allow these things to be added, they will increase the principal balance and, therefore, they will also increase the amount of interest they pay. This can amount to hundreds of Dollars, and it is entirely unnecessary.

Purchasing More Car Than They Can Afford

Consumers will benefit most from a vehicle that has enough space to carry themselves and their family members from place to place. If they purchase a vehicle much larger than this, they will be contributing more money than is necessary toward a vehicle. If buyers decide that they will purchase more vehicle than they can afford with zero percent down, the result will be that their payments will be very high. These will also be underwater immediately.

How Much Money Will People Save by Paying Extra?

If buyers have bad FICO scores and were unable to obtain a low APR, they now have the option of making extra payments to decrease the amount of interest that they are paying. For example, a $25,000 auto loan with an 8% APR requires a monthly outlay of $507. If they can spend around $60 more each month, the amount paid in interest will be $447 less.

The buyers in the above example benefit in two ways. If they were to continue as scheduled, they would spend $3,568 in interest. By paying extra every month, they only spend $3,121 in interest over the life of the loan. Furthermore, it will be paid in full in three and a half years rather than four years.

Arranging to Make Extra Payments

People cannot just begin to make larger payments to their lenders. They will need to follow the recognized protocol for performing this action. They will first need to determine if they are going to pay by phone, by check or over the Internet. This amount will be applied toward the principal balance. After about five business days, they will need to call their lenders to be sure it was applied toward their accounts.

How Paying Twice the Amount Owed Every Month Benefits the Consumer

People who decide to pay double the amount they owe in one month will have their due dates pushed forward. For example, the payment may be $500 that is due on January 1. By paying twice the amount in January, they will not be required to make the next payment until March 1. Consumers opt to pay in this manner because it reduces their balances faster. The extra amount paid in January goes toward reducing the principal. Because the principal balance is decreasing every other month at a faster rate than if they made their regularly scheduled payments, the interest also decreases more quickly.

Making Extra Payments without Advancing the Due Date

Buyers can also send payments that will be applied directly toward the principal only. They will need to inform their lenders that this is their intention. With this option, their due dates will not be advanced when they send the lender two different payments in one month. This means that borrowers can make their regularly scheduled payments on the first of the month and a second one that is marked “principal only.” The next due date will be the first of the next month.

Fine Print to Be Aware of when Considering a Rebate

By not being aware of what is written in the fine print, some have missed out on discounts. The first thing they will need to be aware of is the date by which they will need to accept it. The language that will lead them to this information is “must take delivery by.” This means that in order to receive the allowance, buyers must take possession of the vehicle by a particular date. If they fail to do so, they will not be entitled to receive the discount.

Buyer Must Meet the Qualifications

“Not all buyers will qualify” means that there are terms and conditions. Before they convince themselves that they are going to receive it and factor the savings into the cost, car buyers will need to make sure that they qualify. In a lot of cases, those with no financial history or poor FICO scores will not be able to receive some offers.

The Possibility of Mileage Restrictions

Buyers may need to agree to certain conditions to be elligible for some offers. For example, there may be a restriction on the number of miles that they can drive for a year, and this may not be possible for some people to accept. They will need to know this before they purchase the vehicle.

Rebate or Low Rates

The “not compatible with other offers” restriction means that buyers will need to choose one discount that the dealer or the manufacturer is offering. In this instance, shoppers will have to choose between a cash-back allowance and a great APR because most lenders are not going to allow buyers to combine a rebate with a discounted rate.

Only at Participating Dealerships

People learn of offers from television or radio commercials, but these bonuses do not necessarily apply to every dealership. Every dealer does not have to offer the manufacturer's discounts to customers, so car buyers will need to make sure that they can receive the rebate at a particular dealership before they decide where they are going to purchase their next vehicles.

Added Accessories May Cost Extra

Consumers must be aware that the vehicle they see advertised is not necessarily the car that they will receive when they accept the discount. The advertisement will, most likely, feature an automobile that has impressive accessories added to it. However, consumers may need to add these accessories at an extra cost.

Only in Participating States

Sometimes, only people in specified states are eligible. However, those living outside of those states have the option of going to the other states where they can receive it if they believe it is worthwhile.

Rebate Only Good for Those Accepting Dealership Financing

The rebate may require obtaining dealer financing. This means that they cannot pay cash or obtain financing from a bank or credit union and receive this particular type of rebate.

The Fine Print Written into Financing Contracts

Auto loans will contain different language in the fine print, and people will need to make sure that they read their contracts fully so that they will be informed of what they are signing. Lenders that advertise for a 0% APR may only be offering it for an introductory period, and this period may be as short as six months. After the introductory period is over, it will adjust higher. Consumers will need to be prepared for this eventuality.

Only Certain People Qualify for the Advertised Rates

Lenders advertise great rates, but everyone who is seeking these offers will not necessarily be eligible to receive them. The dates that they can obtain the advertised APR may be restricted. When people show up at the dealership, they may find that they can only receive the advertised rate if they select a certain make, model or year. Lastly, they may find that they do not qualify because they do not meet the FICO score requirements. Shoppers will want to ask what the requirements are before they agree to accept.

Restrictions for Receiving Low Rates

Some lenders will offer a better APR if buyers agree to do certain things first. For example, they may need to borrow a pre-determined amount of money before they can receive the advertised rate. They may have to sign up for automatic withdrawal before they can receive the better APR, or they may need to have a particular FICO score. In some cases, the products that buyers need to purchase to qualify for the rate will add an extra expense, so they must make sure that this would be agreeable to them before signing the contract.

Beware of the Promise of Low Fees

Lenders may advertise that their fees are better than other lenders' fees. This may be the case, but the fine print will tell them that they will still have several fees to pay, and this includes taxes, application fees and fees to third parties. Consumers must also be aware that they may pay less for fees that other lenders are charging, but the dealer charging less in this manner may charge other fees that they would not have to spend at other dealerships.

The Pre-Payment Penalty

The fine print will let people know whether or not they will be required to pay a pre-payment penalty for paying in full before the loan's term length is up. Lenders have an interest in people repaying on time rather than ahead of schedule. Those who decrease their principal balances early reduce their interest, and the lenders receive less in profit. For this reason, they will add pre-payment penalties to the fine print that prevents buyers from repaying early.

By reading the fine print, buyers will learn whether or not their loans are front-loaded. If they are, the interest due will be paid at the beginning of the time period. When this is the case, paying the loan in full a year early will not help reduce the amount of interest paid.

Some fine print informs consumers that they will agree to pay the entire amount of interest along with the principal whether they pay early or not. In one other case, consumers will be required to pay a penalty based on the amount of the balance that remains.

Following the advice in this article will help shoppers obtain the most advantageous deal, but they can learn quickly which option will be the better choice by using the above calculator. The key is to come to the negotiating table well prepared.