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%|
|Less Down Payment||-$1,200||-$1,200|
|Less Manufacturer's Rebate||$0||-$1,500|
|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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