Cash back or a low APR: how to compare the two offers
New-car incentives often come as a choice: cash off the price, or a low promotional interest rate. Usually both are not offered together. Which one costs less depends on the numbers, not on which one sounds bigger.
The fair comparison
The fair way to compare is two full loans over the same term:
- Rebate: the price minus the rebate, financed at your own pre-approval rate
- Low APR: the full price, financed at the promotional rate
The one that costs less in total is the cheaper choice for those inputs.
A worked example
A hypothetical: a $32,000 car over 60 months, with a choice of a $3,000 rebate or a 2.9% promotional rate, and a 6% pre-approval.
- Rebate: $29,000 at 6% is about $561 a month, about $33,639 in total
- Low APR: $32,000 at 2.9% is about $574 a month, about $34,415 in total
In this example the rebate side costs about $776 less. Change the inputs and the answer can flip.
What moves the answer
A smaller rebate, a lower promotional rate or a higher pre-approval rate all push toward the low APR. That is why the planner's calculator runs both loans with your numbers instead of using a rule of thumb. The pre-approval from a bank or credit union (bring your own financing) supplies the rate for the rebate side.
Things to check before comparing
- Promotional rates may require strong credit or a shorter term, so confirm the buyer would qualify.
- In some states, sales tax is charged on the price before the rebate, which trims the rebate's value a little (rules by state).
- The incentive comes after the price is settled, not instead of settling it.
Common questions
- Is cash back or a low APR cheaper?
- It depends on the price, the rebate, the promotional rate, the term and the rate on your own pre-approval. Compare two full loans over the same term and the one with the lower total costs less. In the worked example, the $3,000 rebate side costs about $776 less than the 2.9% side.
- What rate goes on the rebate side of the comparison?
- The buyer's own pre-approval rate, because taking the rebate means financing the lower price at that rate.
Where this fits
Part of stage 3 of the method: Leave one square open: price, as an out-the-door total. Related: Rebate or low APR?, Bring your own financing.