Car Finance Considerations

Car Finance Considerations http://learningcenter.statefarm.com/auto/buying/car-finance-considerations/ bb3 Feb 7, 2011

By Staff writer State Farm™ Employee

When you buy a new car, you typically can finance it through the dealership or through a bank. Although the bank’s rate of interest may look higher, your total cost of financing – your annual percentage rate – may be lower.

Dealers often offer incentive packages, giving buyers a choice between low-interest financing or a rebate. The dealer’s rate may be less than the rate charged at the bank, but your total cost of financing – and your monthly payment – may be lower when the rebate is considered.

The chart below shows different financing options as an example. The dealer is offering a choice between 1 percent financing or a $1,500 rebate. Here, the car’s purchase price is $12,000; after a 10 percent down payment, the loan from the dealer will be $10,800. A customer who takes the rebate and uses it to reduce the cost of the car will need to borrow only $9,300. Therefore, the monthly payment will be lower even if the interest rate is higher, so the bank financing would be the better deal.

Dealer Financing Bank Financing
Annual Percentage Rate 1.0% 6.0%
Purchase Price $12,000 $12,000
Less Down Payment -$1,200 -$1,200
Less Manufacturer's Rebate $0 -$1,500
Amount Financed $10,800 $9,300
Monthly Payments (48 Months) $229.62 $218.41

Because interest rates, car prices, and dealer incentives change all the time, you can use a car loan calculator to compare different financing offers that you may be considering. That way, you can determine what’s best for you.

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