When the market gets soft, and it has, automakers usually revert to incentives, and they have.
But, which is more beneficial to the consumer, discount financing or a cash rebate incentive?
Take 0.9 or 1.9 or 2.9 percent or instead take $1,000 or $2,000 or $3,000 in cash?
“When it comes to incentives and a choice between a cash rebate or a discount financing rate, the financing rate or low APR wins 60 percent of the time,” said Art Spinella, general manager of CN/W Marketing Research of Bandon, Ore., a company that specializes in determining why people buy the vehicles they do.
“The discount financing usually is worth more than the rebate, which would have to be an awful lot to offset the amount of money saved from a low APR,” Spinella said.
“When consumers go for the rebate, usually it’s because they don’t have enough money on their own for a downpayment,” Spinella said. “When it comes to taking the rebate, 80 percent of the time it is signed over to the dealer for the downpayment.”
To decide which is better, the experts advise you weigh the amount of savings from discount financing against the amount of the rebate.
So we cornered a dealer who, with financing rate book and calculator in hand, volunteered under cloak of immunity as well as identity to put dollars into the equation to help come up with an answer to what puzzles many consumers.
The answer over whether discount financing or rebate is best is that for the most part, take the low-cost financing and run.
Here’s his example:
You want to buy a new Ford Explorer sport-utility vehicle. It cost $25,000. After your trade in, the purchase price comes to $20,000, the amount you will finance.
Ford is offering 1.9 percent financing for 60 months or a $1,500 rebate.
The monthly payment on the $20,000 balance on that Explorer at 1.9 percent over 60 months would be $349.68. At the end of 60 months, the total amount of interest you would pay would be $980.80.
But rather than discount financing, you opt for the $1,500 rebate and then go to a lending institution where you obtain a 9.25 percent interest rate on a 60-month loan to pay off the $18,500 ($20,000 minus $1,500 rebate) balance.
By the way, the 9.25 percent rate was chosen as a fairly representative example of new-car loan rates that, according to a recent table in the Sunday Transportation section, can vary from 8.2 percent to 12.4 percent.
Your monthly payments on that $18,500 balance would be $386.28 and at the end of 60 months, the total amount of interest you would pay would be $4,676.80.
(Without discount financing or a rebate, if you went to a lending institution and obtained a loan at 9.25 percent for 60 months on $20,000, your monthly payments would be $417.60 and the total amount of interest you would pay would be $5,056.)
So by taking the 1.9 percent financing rate instead of the $1,500 rebate, your monthly payments would be $349.68 versus $386.28, or $36.60 a month less. And the amount of interest paid over the life of the loan would be $980.80 with discount financing versus $4,676.80 with the rebate, or $3,696 less.
But, say, for example, that between your trade-in and down payment, you have a balance of $7,500 rather than $20,000.
Not wanting to take the 60-month route for only $7,500, you have a choice of 2.9 percent financing for 48 months or a $1,000 rebate.
At 2.9 percent for 48 months, your monthly payment would be $165.68 and the total interest that would be paid over the life of the loan would be $452.64.
But you opt for the $1,000 rebate to bring the balance down to $6,500, and you obtain a 9.25 percent loan for 48 months to pay it off.
Your monthly payment would be $162.53 and the amount of interest paid over the life of the loan would be $1,301.44.
So your monthly payments at 2.9 percent on $7,500 would be $165.68, or $3.15 more than paying 9.25 percent on $6,500 for the same amount of time, but the total interest paid would be $848.80 more over the life of the loan.
Of course, there are exceptions.
The first exception is that not everyone has the dough for a down payment to qualify for a loan in the first place. Often the lender will require 10 percent down, or on a $20,000 vehicle, a $2,000 down payment. Perhaps the buyer has scrapped together only $500 and that $1,500 rebate is needed to come up with the $2,000 down payment to qualify for a loan.
That makes the choice between discount financing and a rebate a no-brainer in favor of the rebate.
There’s another exception. Some folks don’t have to worry about qualifying for a loan. They’ve saved money and can easily afford to put a lot of dough down on that new vehicle purchase to reduce the balance.
But consider the difference between paying interest on a 1.9 percent loan versus earning interest on your money a money-market fund or another type of investment.
Say you decide to buy a $35,000 sport-utility vehicle offering a discounted 1.9 percent interest rate over 60 months. Rather than pay 1.9 percent on $35,000 for monthly payments of $611.94, you put $15,000 down to reduce the balance to $20,000 and monthly payments of $349.68.
So not only do you reduce your monthly payments by $262.26, you also reduce the total amount of interest you would pay over the life of the loan from $1,716.40 on $35,000 to $980.80 on $20,000–a $735.60 savings over 60 months.
But, rather than put $15,000 down, you put $15,000 into a money market fund paying 7 percent interest. In five years you will have to pay out $1,716.40 in interest on the $35,000 balance owed on the new vehicle, but in one year the interest earned from the money-market fund would total $1,050.
And the money market investment has four more years to earn you extra dough.
Not everyone has the dough for a down payment to qualify for a loan. That makes the choice a no-brainer.
