Auto Loans – Lease or Buy

Without a doubt, low-rate financing from automobile dealers tends to attract the attention of many automobile shoppers. Compared to bank auto loans, which can run about 2 percentage points higher, dealership-financing rates are certainly enticing. However, did you know that some dealers offer a substantial rebate if you pay cash rather than take out an auto loan? For this reason, when you are shopping for the best "deal," don't overlook your bank as an economical financing source.

Suppose you have your heart set on a $20,000 minivan. After some comparative shopping, you find a local dealership that offers a favorable 7% financing rate. The same dealer also offers an attractive $1,500 rebate for cash purchases. You check with your bank and find that they offer a 9% financing rate. At first glance, you might be compelled to take the dealership's rate of 7%. But if the choice is between a low-rate loan and a rebate, you'll be better off taking the rebate and getting the auto loans from a bank. Let's take a closer look.

On a $20,000 car with a $4,000 down payment, your monthly payment on a 7% four-year, $16,000 loan is $383.14/month, and the total cost of the loan would be $18,390.69. Now, if you take the $1,500 rebate on top of the $4,000 down payment on a 9% bank loan, your monthly payment on a four-year $14,500 loan would be $360.83/month and the total cost of the loan would be $17,320.02.
In the preceding example, the bank financing/dealership rebate combination provides a savings of more than $1,000. Therefore, when you go shopping for a new car, always be sure to know all your financing options. A closer look may yield substantial savings!

Interest rates stated in this article are for illustrative purposes only and do not reflect actual rates offered.