Cash rebate vs. low interest rate? Why it’s better to take the cash on your next car

When you set out to buy your next car you will hear lots of auto manufacturers advertising many different promotions like low interest rates and huge cash rebates but the catch usually is…. You can’t have both. You will have a decision on which option to take – the money or a low promotional interest rate.

Cash rebates are a pre-tax discount a manufacturer will give you in lieu of a promotional finance rate. A promotional interest rate is a lower rate than the standard rate of interest the manufacturer or bank will lend to you at. I’ll help you understand which one is better for you and analyze this with an example I show people on the daily when we have selected the right car and are now picking our purchase options.. I’ll use the new 2014 Honda CR-V EX AWD. The promotional interest is 1.99%  APR and the standard is 4.99% APR. Honda offers a $2500 cash rebate in lieu of financing. I have worked out two samples over two different terms applying the current cash rebates and available promotional interest rate.

MSRP $32,985 plus levies and taxes.cr-v20142

60 months @ 1.99% =$ 658.25
60 months @ 4.99% –$2500 rebate = $655.88

84 months @ 1.99% = $479.57
84 months @ 4.99% –$2500 rebate  = $491.34

Most cash rebates equal the cost to buy-down the interest rate on the 60 month term, as seen in the example above by the payments being only a few dollars off. But in this case the lower payment may not be the best choice. Below are the reasons why each option is the best for you.

When you should take the cash rebate vs. When you should take the rate

Take the cash when:

  • you plan to pay off early or make extra payments.
    If the payments are the same or close for both options and you plan to pay it off sooner or make extra payments, the cash option will have a lower principal amount to pay off.
  • you are trading in a vehicle that is paid off and worth some value.
    The cash rebate is equal to the amount of money borrowed over the 60 month term. If you are borrowing less than the full purchase price of the vehicle because you are selling a car back to the dealer, then taking the cash will ensure you receive maximum discount off the vehicle.
  • plan on financing less than 60 months.
    Because the cash rebate is based on buying down the rate on a 5-year loan, financing less then 5 years will not give you the same benefit. The payment will be lower and you will owe less.

Take the promotional interest rate when:

  • you plan on riding the payments out as part of your budget
    As long as the payment is lower when taking the interest rate, and you don’t make any extra payments, then you will in the end pay less. Most of the time the saying is true “if the payment is less, you pay less”.
  • you are trading a vehicle with negative equity
    A vehicle with negative equity is one that has a loan on it that exceeds the trade-in value. This means you will need to borrow more than the purchase price of the vehicle. Since the cash rebate is based only on the price of the vehicle over 60 months, you will be benefit more by being able to finance the extra money at the dealers low rate.
  • plan on financing longer than 60 months
    As you can see in the example above, the interest rate is better on longer terms. You maximize the effectiveness of the low rate when you apply it to longer terms.

There are reasons to take each promotion over the other. But if the payment is the same or close, like in the 60 months options displayed above, take the cash. This will give you flexibility if you want to sell/trade your vehicle early by owing a lower amount. And as someone who loves cars and switches often, I always take the cash.

If you want to see which option you should take on your next car, shoot me a message. I’d love to help.

Ryan McVeigh

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