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Drivers across the country have put off buying cars for more than a year because pandemic prices hit all-time highs and have stayed that way. Along the way, buyers have seen the once common incentives from dealers and manufacturers dry up.
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But now, with evidence that the market may be starting to relax, there is hope that the auto industry will start offering lucrative cash rebates or 0% APR offers again. When this happens, what should you choose if such an offer is tied to a car you like?
Here’s what you need to know to make the right choice.
Find out if you qualify – if not, the decision is made on its own
Car dealerships make their money at the finance desk, so 0% APR is a really great deal – but if you read the fine print, you’ll notice it only applies to those with really great credit.
If your credit score recently broke through the elusive 700 barrier after languishing in the 600s, good for you, but even that probably isn’t enough to qualify you for a 0% APR deal. According to Forbes, you’ll likely need a credit score of at least 720, which is where FICO says the “excellent” credit range begins. But FICO scores go all the way up to 850, and the higher you go, the better your odds. According to Equifax, 740-799 is generally considered only “very good”, with a strong start at an enviable 800.
This will vary by offer and dealership, but they’re not kidding when they say “qualified buyers only”.
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Do the math
If you qualify for the 0% APR deal, the next step is to use an auto loan calculator like the one from Cars.com to compare the cash back to the value of the zero rate offer.
If the car you buy costs $30,000, for example, and you contribute 10% ($3,000), you will finance $27,000. Assuming an interest rate of 4.0% and a term of five years (60 months), you would pay $2,835 in interest for a combined car price of $29,835 over the term of the loan and a monthly payment of $497.
If you accepted the 0% APR deal, you would pay no interest and only repay the principal of $27,000. Your monthly payment drops to $450.
Assuming a cash back of $1,000 added to the down payment – which is what cash backs usually are – you would only finance $26,000 and pay $2,730 in interest.
A thousand dollars is a huge discount, but it pales in comparison to the $2,730 you would pay in finance charges. The 0% APR offer is better in this case – and it would be even better even if the discount doubled. Say you get a $2,000 discount, which is highly unlikely for a $30,000 car, even in normal times. You would still pay $2,625 in interest, leaving you in the hole for $625 over the life of the loan.
Weigh the variables
The rigorous calculations that emerge from the Auto Loan Cost Comparison Calculator are a good place to start, but you have a few other considerations to make.
For example, if you reduced the term from 60 months to 48 or 36 months, you would pay significantly less finance charges over the life of the loan. This makes cash back much more attractive.
On the other side of the coin, if you took the APR offer, your monthly payments would decrease, meaning you might be able to pay more than the minimum each month and eliminate debt sooner.
Edmunds offers a more comprehensive auto loan calculator designed specifically to help you choose between a low APR offer and cash back. The calculator includes variables such as sales tax, value and amount owed on your trade, as well as title and registration fees, allowing you to compare options in much greater detail.
As with everything, there are pros and cons to each.
The right thing to do depends on the details of your unique situation, but both options have their own advantages and disadvantages.
Typically, 0% APR offers lower your monthly payments and help you avoid hefty long-term finance charges, but you must have excellent credit and meet strict qualifying standards to take advantage of them.
Cash back is not tied to credit requirements and can reduce the amount you need to borrow by increasing your down payment. The trade-off is that they rarely match the savings of 0% APR transactions on all but the shortest loans.
A universal downside is that discounts and 0% APR offers are usually limited to certain models.
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