Evaluate financing options and rebates
When you look at financing that new vehicle, your usual choices are going to be dealer financing or getting your own financing from a bank, credit union or other lender.
Deciding which way to go can be confusing because manufacturers and dealers offer a wide array of promotional finance deals. So, consider any special deals as just a starting point, especially when there's a choice of low-rate financing or a cash manufacturer's rebate. A really low interest rate sounds attractive, but it may not always save you the most money.
So what's the better deal: getting a low financing rate (assuming you qualify for it) or a $2,000 rebate? Do the math before you decide.
First, everyone is eligible for a manufacturer's rebate, which isn't true for the financing deals, which may depend on a high credit score. To get an estimate of what the best deal may be, consider this rebate vs. financing comparison:
For your vehicle of choice, the dealer is offering 2.9 percent financing on a four-year, $15,000 loan, or 8 percent financing on a four-year loan with a $2,000 rebate.
Start by taking half of the loan amount and multiplying it by the difference between the two financing rates. This gives you an estimate of how much money can be saved per year with the cheaper financing rate. For simplicity's sake, round up the 2.9 percent interest rate to 3 percent.
In this case, multiply 7,500 by .05 (5 percent, which is the difference between the two interest rates of 8 and 3) for a total of $375. Then multiply that $375 by the number of years in the loan -- in this case, four. The answer, $1,500, is the amount you would save by taking the four-year loan at the lower interest rate. Because the rebate is $2,000, you would save an additional $500 by choosing the rebate over the interest rate.
If you don't want to do the math, use Bankrate's calculator.
Of course, people with good credit ratings can get the best of both worlds by taking the rebate from the dealer and getting the same low rate -- or lower -- somewhere else. For example, if you have to take their financing deal (higher rate) to get the rebate, you would take the higher interest rate loan to get the rebate, and then refinance the loan through your lending institution. If you get the rebate regardless of how you finance the vehicle, then you can use your lender to pay for the vehicle.
The best way to buy and finance a car is to shop around for the loan first. You can check your local lenders and also Internet lenders that often offer very good rates. They usually will approve you for a total amount to be financed before you go shopping, leaving you free to concentrate on price alone.
Remember, the car dealer is little more than a middleman when it comes to financing. Often, dealers bump up the auto loan rates of the banks and finance companies with which they do business. A customer may do better elsewhere.