Cash back or a low interest rate?
Car makers often let you choose between a cash rebate and a low promotional rate, such as 0% or 1.9% APR, but not both. The cash back lowers the amount you borrow, while the low rate lowers the interest you pay on it. This calculator works out both loans side by side, shows which one costs less in total, and how the answer changes if you pay the loan off early.
How the offers are compared
- Cash back loan = price − down payment − trade-in − cash back, at the regular (high) rate.
- Low rate loan = price − down payment − trade-in, at the promotional (low) rate.
- Monthly payment of each loan: M = P × r × (1 + r)n / ((1 + r)n − 1), where r is the yearly rate / 12 and n the number of months.
- Total cost = M × n + cash paid at signing + trade-in value. The offer with the lower total cost is the better deal.
Put simply, the low rate wins when the interest it saves is larger than the cash back. The break-even cash back, the rebate at which both offers cost the same, is loan × (1 − Mlow / Mhigh), where Mlow and Mhigh are the payments per dollar borrowed at each rate. A bigger rebate than that makes cash back the better choice.
The sales tax is the same for both offers: in most states a manufacturer rebate does not lower it, because the tax is charged on the price before the rebate. A few states tax the price after the rebate; check the bill of sale with your dealer.
Example
A $50,000 car with $10,000 down, 7% sales tax and $2,000 of fees paid up front, financed for 60 months:
- $1,000 cash back at 7.14%: you borrow $39,000, pay $774.83 a month and $7,489.52 of interest.
- 2% with no cash back: you borrow $40,000, pay $701.11 a month and $2,066.62 of interest.
The low rate saves $5,423 of interest, more than the $1,000 rebate, so it is the better deal by about $4,423. The cash back would have to be at least $4,710 to win. If you pay the loan off early, the low rate is better only when you keep the loan 7 months or longer; paid off sooner, the cash back costs less.
Which offer wins by loan term
The same car, $1,000 cash back at 7.14% against 2%:
| Term | Interest with cash back | Interest at low rate | Better offer |
|---|---|---|---|
| 24 months | $2,967 | $839 | Low rate by $1,128 |
| 36 months | $4,441 | $1,245 | Low rate by $2,196 |
| 48 months | $5,949 | $1,655 | Low rate by $3,294 |
| 60 months | $7,490 | $2,067 | Low rate by $4,423 |
| 72 months | $9,063 | $2,481 | Low rate by $5,581 |
The longer the loan, the more interest the low rate saves, so the more it wins by.
Break-even cash back
The rebate at which both offers cost the same, on a $40,000 loan over 60 months. If the cash back you are offered is larger, take it; if it is smaller, take the low rate.
| Regular rate | vs 0% | vs 1.9% | vs 2.9% |
|---|---|---|---|
| 5% | $4,673 | $2,940 | $2,007 |
| 7% | $6,332 | $4,681 | $3,792 |
| 9% | $7,884 | $6,309 | $5,461 |
When cash back wins
- Short loans and small loan amounts: there is less interest for the low rate to save.
- A small gap between the rates: a good rate from your bank or credit union shrinks what the promotion saves.
- Paying early: if you plan to sell the car or pay the loan off well before the end, the rebate is often better.
- Paying cash: without a loan, the low rate is worth nothing and the rebate is pure savings.
Tips before you choose
- Get pre-approved by a bank or a credit union first: that rate is the one to compare with the promotion.
- Promotional rates usually need excellent credit and may only apply to shorter terms or certain models.
- Negotiate the price before you mention the offer, so the rebate or the low rate is not taken out of a discount.
- See the full payment with tax, fees and a trade-in in the auto loan calculator, or compare with leasing in the auto lease calculator.
- If a dealer quotes only a monthly payment, the interest rate calculator finds the real rate behind it.