Car Finance Considerations

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.

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.