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Which Is Better? Cash Back vs. Low APR Financing
Comparing financing options for the best deal on a new car

One of the best ways to save money while buying a new car is to take advantage of a special incentive. These deals are commonly offered in the form of cash back or low APR (Annual Percentage Rate) financing. However, you typically can’t use more than one incentive at a time, so knowing how they work is critical to knowing how much they can save you.

What is a cash back offer on a car?

Cash back is offered on all kinds of products, including cars, and is known by many names such as rebates, cash rebates, cash incentives, or bonus cash. It is money given back to the buyer in exchange for purchasing the vehicle, and it’s usually applied toward the down payment. “Rebates are typically provided by the car manufacturer, not the dealer,” says Jerry Brown, finance expert, in an article for Bankrate. “If you have plenty of cash to pay the down payment on your own, the rebate can be sent to you in the form of a check instead.”

Cash back deals are a fixed dollar amount, making it more straightforward to calculate savings compared to low APR financing offers. To determine how much money a cash back deal can save you, you should first find out if the money is deducted from the purchase price before or after taxes are calculated. If the former, it can help you save even more money. Keep in mind that when financing a car, reducing the purchase price with a cash back incentive will also help you save money on interest by reducing your total loan principal.

However, buyers must often meet certain requirements to qualify. A common cash back offer is a loyalty bonus for buying a new vehicle of the same brand you already own.

What is low APR financing?

Low APR loans typically come from the financing arms of manufacturers. They can save you money with lower interest rates than you would be able to get from a loan issued by a financial institution. In some cases, you may even benefit from a zero APR loan, meaning you only have to pay back the exact amount you borrow. This makes it easy to calculate the total cost of the car. “A buyer needs excellent credit to qualify, however, so not everyone will be eligible,” warns Ronald Montaya, senior consumer advice editor for Edmunds.

To determine how much low APR financing can save you, you’ll need to compare the loans available to you. Get pre-approved for a car loan before you go shopping so that you are able to compare interest rates to what the dealership offers. “Low interest rates are sometimes tied to the length of the loan term, so pay attention to this detail,” Montaya writes. Getting a loan pre-approved will also be helpful should you fail to qualify for the low APR financing offer.

Cash back vs low APR — which is better?

The best incentive for you depends on your financial picture. “Unfortunately, most auto manufacturers don’t allow buyers to combine both deals, so you will have to make a decision,” Brown says. The first thing to consider is the criteria. For example, if you do not have good credit, then the cash back offer may be the only one available to you. To choose the best deals, you’ll need to compare all of your options, do a little math, and decide whether you value lower monthly payments over a lower total cost. For a clearer picture, talk to a financial advisor at your local financial institution who may even be able to pre-approve you for a more competitive loan.

Published by Arundel Federal Savings Bank
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Disclaimer - All content contained in this newsletter is for informational purposes only and should not be relied upon to make any financial, accounting, tax, legal or other related decisions. Each person must consider his or her objectives, risk tolerances and level of comfort when making financial decisions and should consult a competent professional advisor prior to making any such decisions. Any opinions expressed through the content in this newsletter are those of the authors and do not necessarily represent the opinions or policies of Arundel Federal.
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