Cash Back or Low Interest Calculator
Use this calculator to compare a cash back offer versus a low interest rate offer for your auto loan and determine which option saves you more money over the life of the loan.
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Cash Back vs. Low Interest Rate: Which is Better?
When purchasing a new car, dealerships often present two enticing offers: a cash back rebate or a special low interest rate. Deciding which option provides the most savings can be tricky, as it depends on several factors, including the loan amount, term, and the difference in interest rates.
Understanding the Offers
- Cash Back Offer: This is a direct rebate from the manufacturer or dealer that reduces the total purchase price of the vehicle. While it immediately lowers the amount you need to finance, the loan itself might come with a higher standard interest rate.
- Low Interest Rate Offer: This offer provides a significantly reduced Annual Percentage Rate (APR) on your auto loan. While you don't get an upfront cash rebate, the lower interest rate can lead to substantial savings over the life of the loan by reducing the total interest paid.
How to Compare
To make an informed decision, you need to calculate the total cost of each option. This involves:
- Calculating the effective loan amount for each scenario:
- For cash back, subtract the cash back amount from the vehicle price before calculating sales tax and the loan amount.
- For the low interest rate, use the full vehicle price.
- Calculating the monthly payment for each scenario: Use the respective interest rates (high for cash back, low for low interest) and the loan term.
- Determining the total interest paid for each scenario: Multiply the monthly payment by the loan term and subtract the principal loan amount.
- Calculating the total cost of ownership for each scenario: This includes the vehicle price, total interest paid, sales tax, and any other fees.
The offer that results in the lowest total cost of ownership is generally the better financial choice.
Key Factors to Consider
- Loan Term: Longer loan terms magnify the impact of interest rates. A low interest rate becomes more valuable over a longer term.
- Amount of Cash Back: A very large cash back amount might outweigh a small difference in interest rates, especially on shorter loan terms.
- Interest Rate Difference: A significant difference between the high and low interest rates will make the low interest offer more appealing.
- Your Credit Score: Excellent credit is usually required to qualify for the lowest advertised interest rates.
Our calculator simplifies this comparison by performing all the necessary calculations for you, helping you make the best decision for your car purchase.