As both a finance and sales manager for many years in the auto business, I came across this question often: Which is the better program for me: The low interest rate or the manufacturer’s incentive? The answer is, it depends on several factors, which I will attempt to clarify in this article.
Manufacturers have for years offered the choice to consumers: Low rate OR the manufacturer’s incentive. The key word here is “OR.” In most cases, you must give all or part of an incentive up in order to receive the low rate financing. Let’s look at an example: Let’s say you need to finance $20,000, and you have the choice of either 0% financing OR a $3,000 down payment assistance incentive. Let’s assume you will qualify for a regular interest rate at 6.99% APR on a 60 month loan.
$20,000 financed at 0% on a 60 month loan is about $333/month. $20,000 less the $3,000 incentive = $17,000 financed at 6.99% for 60 months, which is about $336/month. Why are the payments so close? Because you are paying interest on a smaller loan in the second option, and the interest brings your amount paid over the loan term up to just over the $3,000 rebate amount.
So, the 0% is a better deal because the payment is lower, right?
Not necessarily. This is where the “it depends” part comes in. In this hypothetical scenario, let’s say you want to trade your car in at three years. That would mean you made 36 payments on it Look at what you owe in these scenarios: On the 0% loan, you would have a payoff of about $8,000 if you have 24 months remaining. On the 6.99% loan, you would owe a little over $7,500.
Why the difference?
Because you took the $3,000 incentive off the loan originally, as your initial balance was less ($17,000 vs. $20,000). And at the three-year mark in this example, the interest you’ve paid so far on the 6.99% loan is less than the $3,000 incentive you took off the $20,000 initially. So you owe less on the vehicle.
But I’m paying less in the monthly payment, right?
True, the payment is $3/month less than the 6.99% payment, but if you add that up, you are saving only about $110 over 36 months. Compare that to the nearly $500 you save in the payoff comparison, and you still come out somewhat ahead in the 6.99% scenario.
Of course, if your plan is to keep the car until your loan is paid off, then you would come out about $180 ahead of the game with the 0% option (because of the $3 payment difference).
Let’s look at one more scenario: 2.9% for 72 months OR a $3,000 down payment assistance incentive. Again, let’s assume you will qualify for a 72 month loan at 6.99% APR:
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$20,000 financed at 2.9% for a 72-month term is about $302/month. Not bad, right? $20,000 less the $3,000 incentive = $17,000 financed at 6.99% for 72 months, which is about $289/month. Nice payment, right? Well, it gets even better now. Let’s say you want to trade your car in again at the 36-month mark. In the 2.9% scenario, you would owe over $10,400 on the loan. But with the 6.99% loan, you would only owe a little over $9,400! So, not only are you making a lower monthly payment, you will also have a much lower balance at the 36 month mark than with the 2.9% rate.
So, when does it make sense to take the low-rate financing instead of normal rates and incentives?
Sometimes manufacturers offer low rates that more than offset the incentive option. Consider this example: You can choose either 0% financing for 72 months OR a $3,000 incentive. And let’s assume you are financing more this time: $30,000.
