Whether you’re watching television or listening to the radio (or even surfing the internet), you’re bound to see an ad for a vehicle. Car ads often promote a limited-time offer of either cash back or low-interest financing on car loans.
Both of these options can help lower the overall cost of buying a new vehicle. However, you usually have to choose between the two. How do you know which one is the right option for you? We looked at the pros and cons of both options to help you make the right choice.
Cash Back Offer
A cash back offer is a great way to help increase your down payment, which in turn helps reduce your monthly payment.
How does a cash back offer work? Think of it as a coupon that reduces the overall price of a vehicle. For example, if you’re considering a vehicle that costs $25,000 and the automaker is offering $3,000 cash back, you’ll end up paying $22,000. Keep in mind that if you are able to negotiate a lower price, you can achieve even greater savings.
The downside of cash back offers is that you usually can't combine them with a low-interest financing offer from the automaker. You'll have to get a loan through your own bank or credit union, which may be offering higher auto loan rates. You can also pay cash, but given the cost of new cars, that isn't possible for most people.
Low-interest financing is the other popular option automakers roll out for car loans. An automaker uses their own financing department or teams up with an outside lender and offers auto loan rates that are below what you can get at your own bank or credit union.
A lot of times, these offers boast zero-percent financing. This means you only pay the amount you borrowed, making this a huge advantage when it comes to the overall costs. For example, if you decide to get a loan of $25,000 with a 5 percent interest rate for 48 months, you’ll end up paying more than $27,600 in total. That extra $2,600 is all interest. Now, if we swap the 5 percent with zero and perform the same calculation, you’ll end up paying no interest.
However, there is a huge asterisk when it comes to low-interest financing. To qualify for a low-interest loan, your credit score must be good and you must have a solid credit history.
Which Option Is the Best?
Choosing between cash back and low-interest financing comes down to your personal situation. If you don’t have a good credit history, then the cash back option is probably best. If you have good credit, then the low-interest financing option might work out better, especially if the interest rate is at or near zero percent. Chances are your bank isn't going to be able to beat that.
The best way to decide is to sit down and work out the numbers with both options. You can use our car payment calculator to crunch the numbers and figure out which option is best.
In addition to savings off MSRP, getting the best interest rate on your car loan can save you thousands as well. Compare rates from up to four lenders with MyAutoloan to get the best deal.