Thursday, August 2, 2007

Which is better: a cash incentive or 0% financing?

When auto manufacturers want to move certain models or generate more traffic in their dealerships, they'll typically offer new car purchasers a choice between a cash rebate and low-interest financing, sometimes as low as 0%. Which is the better deal?

For some buyers, the question is moot. While cash rebates are available to anyone, 0% financing is usually available only to those who have excellent credit and reach a certain income level. Further, special financing is often limited to loans with terms of 36 months or less. Shorter-term loans mean higher monthly payments, which may not fit into some buyers' budgets. In these cases, the cash rebate may be the only viable option.

If you do have a choice, though, the better deal depends on many factors, including the price of the car, the size of the rebate, the interest rates available for financing, and how much you're putting down.

For example, say the car you want has a price tag of $20,000, and you're putting $1,500 down. Your choice is 0% financing for 36 months or a $2,500 cash rebate. You can get 36-month financing at your bank at 4.5%. With 0% financing, your total payments would be $18,500. With the rebate, your total payments would be approximately $17,134. In this case, you'd save $1,366 by choosing the rebate.

Before you go to the dealer, find out if any of the cars you're looking at qualify for rebates or special financing. Unscrupulous dealers may not disclose incentives to you. And always negotiate the car price separately, before considering the rebate or financing--or any trade in for that matter--as the dealer may bump up the car price to compensate for them.

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