Cash Back or Low Interest Calculator

Manufacturers use incentives to move inventory, and they usually come as a choice: take a cash rebate off the price, or accept the automaker's financing at a promotional rate. Comparing them takes more than a glance, because one lowers what you borrow and the other lowers what borrowing costs. With the defaults, taking $1,000 cash back and financing at 5% costs $59,658.69 in total, while the 2% offer costs $57,566.62, so the low rate saves $2,092.06.

Cash Rebate

A cash rebate, also called cash back or a customer cash incentive, is money the manufacturer pays toward the purchase. In practice it is almost always applied at signing to reduce the amount you finance, though some buyers take it as a check. Rebates on new cars commonly range from a few hundred dollars to several thousand, and they tend to be largest on slow-selling models, outgoing model years and trucks late in the year.

Rebates come from the manufacturer, not the dealer, so they are separate from the price you negotiate. Agree on the price first, then apply the rebate; a dealer that folds the rebate into a single negotiated number can make a weak deal look strong. Several rebate types can stack, such as loyalty, conquest, military or recent-graduate cash, while others exclude each other, so ask for a written list of every incentive on the vehicle.

In most states sales tax is calculated on the price before the manufacturer rebate is subtracted, so a $1,000 rebate does not lower your tax bill. A few states tax only the price after rebates. The calculator assumes tax on the full price.

The rebate is most valuable when you can borrow cheaply elsewhere. A credit union loan at a rate close to the promotional rate, or paying cash, captures the rebate without giving up much on interest.

Low-Interest Financing

Low-interest or 0% financing comes from the manufacturer's captive lender, such as the finance arm of a car maker, which subsidizes the rate to make the car more attractive. These offers usually require top-tier credit, often a score of about 720 or higher, and may be limited to shorter terms such as 36 to 60 months.

The value of a low rate grows with the loan amount and the term. A larger loan, a smaller down payment or a longer term all make the cheap rate worth more, while a big down payment or a short loan favors the rebate. Read the fine print: buyers who do not qualify for the advertised tier may be offered a higher rate, and some promotions apply only to certain trims.

Which One to Choose?

Choose the offer with the lower total cost over the loan, which the calculator shows directly. As a rule of thumb, the low rate wins on large, long loans and the rebate wins when you borrow little or can get a competitive rate from your own lender.

Total cost = upfront payment + monthly payment × n + trade-in value

upfront payment

down payment, plus taxes and fees when they are not financed

monthly payment

loan amount × r ÷ [1 − (1 + r)⁻ⁿ], with the rebate subtracted from the loan for the cash back offer

n

number of monthly payments

The offer with the lower total cost is the better deal, assuming you keep the loan for its full term.

Considerations

Get preapproved first. A loan offer from a bank or credit union tells you the high rate to enter here and gives you leverage at the dealership. If your own lender's rate is close to the promotional rate, the rebate almost always wins.

Will you keep the loan to the end? The comparison assumes you make every payment. If you plan to sell, trade in or refinance after a couple of years, you will have paid only part of the interest savings from the low rate, while the rebate's benefit came in full on day one. People who often trade cars early should lean toward the rebate.

Consider paying extra. Prepaying a low-rate loan saves little, while prepaying a higher-rate loan taken with a rebate saves more. Car loans rarely carry prepayment penalties, but check.

Look at the whole deal. Negotiate the price, trade-in value and add-ons such as extended warranties, paint protection and GAP insurance separately. A generous incentive does not help if the price is inflated or expensive add-ons are rolled into the loan.

Financing taxes and fees raises the loan and the interest on it. Paying them upfront reduces total cost, especially at the higher rate. Use the toggle to compare.

Think about the opportunity cost of your down payment. Cash put down earns nothing; if it could otherwise pay off a high-rate credit card, a smaller down payment with low-rate financing may be smarter overall.

Watch the term. Stretching a loan to 72 or 84 months lowers the payment but increases the risk of owing more than the car is worth, which becomes a problem if it is totaled or you need to sell.

Check the timing. Incentives change monthly and are often richest at the end of a month, quarter or model year, when dealers and manufacturers are chasing sales targets.

Frequently asked questions

Sources

• FTC – Financing or leasing a car
• Consumer Financial Protection Bureau – Auto loans