The waning months of a model year can be the best time to buy a new car. This is the period during which manufacturers are fielding more generous special offers and incentives to make room for their new products.
Two of the most common are cash rebates and extra-generous loan terms. This can put you in the position of having to decide between the two when both are offered. Here’s what you need to ponder when choosing between cash back and free (zero percent) financing.
Credit Scores Matter
Generally speaking, free financing offers are reserved for buyers with strong credit scores. You’ll typically see a phrase like “not all buyers will qualify” in the fine print of such propositions.
So, what is a strong credit score? The Fair Isaac Corporation’s FICO scores range from 300 to 850 and are the most commonly used measurement in this regard. A good credit score falls between 670 and 739 on the FICO scale. People with scores of 740 to 799 are considered to have very good credit, while 800 or better is considered exceptional.
You’ll have the luxury of making the choice between cashback and special financing if your credit score is well into the good range. If your score is considered good or better, you should keep reading. If it’s considered fair (580 -699) or poor (579 or lower), your only choice here will be the cashback option.
Cash Back Advantages
You can usually choose whether to take cashback in the form of a check or apply it to the purchase price of the vehicle.
Interestingly, employing the cash to bolster your down payment can often get you a better financing rate because the lender will consider you to have more “skin in the game” — so to speak. In some cases, this can also help you qualify for a loan if your credit score is on the softer side.
Even better, clearance-related rebates can often be combined with other offers to lower the price of the car even more. Deals such as those for military personnel, recent college graduates and members of organizations like AARP can deliver significant discounts — even after you’ve negotiated the purchase price of the car.
Free Financing Advantages
Special financing offers are typically made through a manufacturer’s captive lender. That you’ll pay less for a car loan with a free financing offer would appear to be common sense. After all, every interest rate reduction you can get will lower the overall price you’ll pay to buy the car.
Running the numbers through a car loan calculator can illustrate this for you firsthand. Let’s say you’re buying a car with a total price of $30,000, which you’ll finance over 60 months with a $6,000 down payment.
At zero percent, your payment will be $400 monthly and you’ll pay a total of $30,000 for the car. However, if the percentage rate is five percent, your payment will be $452.91 and you’ll pay a total of $33,174.60.
The zero-percent offer seems like the best possible scenario — right?
So, Which Is Better?
Let’s go back to the car loan calculator to see what would happen if we applied a $3,000 rebate to the deal with all of the other terms listed above remaining constant.
Adding a rebate of $3000 to our $6,000 down payment would reduce the monthly payment to $396.30 at five percent interest. This would make our total out of pocket cost for the car $29,778, for a savings of $222 over accepting a zero percent financing deal.
Taking the rebate is a better play in this instance. Further, you can then go with an independent source of financing such as your bank or credit union, or an online lender such as RoadLoans. Any of these organizations might be in a position to offer you an even better interest rate.
Keep in mind though, much depends upon your credit score when choosing between cashback and free financing. You should also consider any other incentives for which you might be qualified.