Cash Back or Low Interest Calculator

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Low Interest Auto Loans vs Cash Back - Which is Better for You?

Hello, Automobile shopper! If you are considering a new car purchase, you have likely encountered dealer promotions that say “Get Cash Back $1,000!” or “0% APR for 60 Months!” These kinds of offers can be very enticing however, choosing between Cash Back and Low Interest financing can be a difficult decision as Cash Back reduces the amount you pay when you purchase a vehicle while Low Interest can save you significant amounts of money over time. This is where our Cash Back vs. Low Interest Calculator can assist you. It will calculate the differences for you so you do not have to guess!

In this article, we will cover the basics of each program, how to determine which program is best for you financially, and how using a calculator can help. We will help you find the best deal whether you are purchasing your first vehicle or upgrading to a more luxurious one. Keep Reading!

Analyzing Cash Back Rewards: Immediate or Deceptive Offers?

For instance, you're at a dealership looking at an SUV when the salesperson presents you a deal with $2000 cash rebate. This appears as though it is “free money” for you. In reality, where a rebate or cash rebate is typically considered a discount off the vehicle purchase price, it reduces the amount that you will finance. Thus, you benefit, in the form of a lower monthly payment or potentially less more total interest, due to a reduced principal amount financed.

But as with all things, there is a catch (and yes, there is always a catch when buying a vehicle right?). Usually, when a manufacturer offers a rebate, it goes hand-in-hand with a higher interest rate than they were previously charged. This is because the dealerships look to sell their inventory quickly by offering these cash incentives. If you receive such a cash rebate because of your qualifications having average or poor credit, this demonstrated will ultimately place you in a situation where you will pay an average or above-average internet rate over your loan term. For example, if you purchase a vehicle that cost $50,000 with $1,000 cash rebate, you will finance an effective amount of $49,000 through the course of a five-year loan at an annual percentage rate (5%) but will have a sizeable interest payment at the end of your loan term.

From conversations with individuals who have purchased vehicles and gotten cash back discounts, I can say that cash back is most useful if you will be paying off your loan quickly or if you have good credit to get a better interest rate. Since cash back is similar to using a coupon at the grocery store, you feel happy at the time because you have received an immediate benefit.

Low-Interest Financing:

Whereas 0% financing or low-interest is about affordability over the long haul; these arrangements will allow you to obtain funds at such a low-rate that you may be able to obtain them without paying an excessive amount of interest (like 0% or 1.9% APR), therefore getting your payments mostly on the principal versus going to pay the bank or the lender for a portion of the principal amount every month; therefore, you can buy your item at a price closer to its sticker [retail] price.

Dealerships love promoting these because they lock you into financing through their preferred lenders, often the manufacturer's finance arm like Toyota Financial or Ford Credit. But here's the rub: To qualify, you usually need top-tier credit (think 700+ FICO score). And low-interest offers rarely stack with cash back - it's often one or the other.

Let's say you're financing that same $50,000 car at 2% APR for 60 months. Without cash back, your loan amount is higher, but the interest savings could add up to thousands compared to a 5% rate. It's perfect for folks who keep their cars for years and want predictable, lower costs without a big upfront rebate.

I remember when my cousin opted for 0% financing on his truck. He didn't get the $1,500 cash back, but over five years, he saved way more than that in interest. It's a classic tortoise-vs-hare situation - slow and steady wins if you're in it for the long haul.

Factors Influencing Your Decision to Buy

Deals & Buyers are NOT Created Equally!
There Are Some Key Ride Elements to Consider In Your Decision Whether to Take Cash Back or Low Interest.
Should You Select A Cash Back Or A Low Interest Offer? Your Credit Score Will Make The Difference In Your Decision.

Good Credit? Low Interest Offers Are Generally Your Best Bet. Bad Credit? Cash Back May Be Your Only Choice, Even Though It May Cost You More In The Long Run.

Loan Term: Short Loan Terms (i.e., 36 Months) Generally Favors Cashback Because Of The Lower Interest Charges Over The Shorter Time Frame. Longer Loan Terms (60 - 72 Months) Generally Favors Low Interest Rates Because Of The Longer Time Period To Accumulate Interest.

Down Payment/Trade-In: Your Down Payment Has The Effect Of Reducing Your Loan Amount - Making Low Interest Even Better For You. If You Are Trading In An Older Car - Be Sure To Value The Trade-In As If It Were An Additional Amount Of Cash Back To You.

Sales Tax and Fees: These sneaky extras can add a lot to the final price tag! In general, sales tax will be paid on the pre-rebate price of the vehicle, but cash back can sometimes reduce the taxable amount depending on the state. Fees such as title and registration (typically around $200 - $500) may be included in the total due or can be paid upfront.

Total Cost of Ownership: Besides your loan, consider other ongoing costs such as insurance, maintenance, and fuel when calculating your total cost of ownership. A car that costs $30,000 and has a low-interest rate, but gets 15 mpg, may cost you more than a $40,000 car with a high-interest rate that gets 30 mpg.

Market Conditions: Currently, the interest rates are constantly changing and depending on the season they can be (such as in late 2022) very different. However, if in a high interest period, getting a low-interest rate offer on a vehicle is very valuable; whereas, if you are in a low interest period, you may be able to take advantage of a cash rebate.

Tip: Run the numbers - Tools like our Cash Back or Low Interest Calculator will take care of the calculations for you!

Real-Life Examples: Crunching Numbers That Count

To make this real, we will go through a couple of different scenarios. These are common examples of automobiles purchased, but please remember that there is some variation in the amount of mileage that buyers get from their vehicles.

Scenario 1: Budget Sedan Buyer.
Auto price: $25,000
Cash back: $500 at 4.5% APR
Low interest: 1.9% APR (no cash back)
Loan term: 48 months
Down payment: $5,000
Sales tax: 6%
Fees: $300 (included in loan)

Using the calculator:
Cash back: Loan $19,770, monthly $438, total interest $1,856, total cost $27,426
Low interest: Loan $20,300, monthly $430, total interest $856, total cost $26,456
Winner: Low interest by $970. Ideal if you have good credit and plan to keep the car.

Scenario 2: Luxury SUV Enthusiast
Auto price: $60,000
Cash back: $2,500 at 6% APR
Low interest: 3% APR
Loan term: 72 months
Down payment: $10,000
Trade-in: $5,000
Sales tax: 7.5%
Fees: $500 (paid upfront)

Calculator results:
Cash back: Loan $44,375, monthly $691, total interest $10,377, total cost $75,252
Low interest: Loan $47,000, monthly $657, total interest $5,304, total cost $72,804
Winner: Low interest again, saving $2,448. But if rates were higher (say 8% for cash back), the rebate might pull ahead for shorter terms.

Scenario 3: Quick Payoff Plan
If you're aggressive about paying off early, cash back wins. Say you pay extra each month to finish in 36 months - the lower principal from the rebate means less total paid, even at higher rates.
These examples show how personalized it gets. Plug in your own numbers to see!

Pros and Cons: Weighing the Trade-Offs

Cash-back Incentives Versus Low-Interest Loans
Considerations for making the right decision:

Pros of Cash Back:
Reduces cost of product immediately
Good option if you plan on obtaining short-term financing or if you buy cash.
Many retailers allow you to stack this offer with other promotional offers.

Cons of Cash Back:
Higher interest rates will reduce or offset your cash back savings.
You may not qualify for the cash back offer if you are planning to use a special promotional financing option.
Tax consequences will differ by state.

Pros of Low Interest:
Large savings over longer terms on the underlying product.
You will know your payments each month.
Building good credit, as long as you manage your account properly.

Cons of Low Interest:
You need good credit.
You will not receive an upfront discount.
You may incur a penalty when paying your loan off early.

If your loan is for an amount less than $20,000 or will be for less than 48 months, in general, consider using cash back. For larger purchases, most times going with low-interest will provide better overall savings.