Rebate vs 0% Financing?

The newspaper car ads are always alluring. They scream "$1500 rebate" and "0% financing!" But in the small print, you'll learn it's an either/or proposition—you have to pick which you want.

Autobytel is now offering a car cost calculator that breaks down the rebate vs. 0% financing question. If you plan to pay all cash and buy the car outright, there's really no question; saving $1500 cash off your $30,000 purchase is the way to go.

But are you better off going to a bank or credit union for a loan and getting the manufacturers rebate, or taking the 0% financing the dealer is offering, usually through the manufacturer's credit arm? (Assuming you have excellent credit and can qualify for these promotional rates.)

A key question is how long you plan to keep the car. If you plan to keep the car for the entire extent of your 48, 60 or 72 month loan, usually you'll be better off taking the 0% financing. But what if you get bored easily, and will only keep the car a couple of years before selling it or trading it in? That's where Autobytel's rebate vs. 0% financing calculator can help.

Let's say the sales price on the car you want, before rebate is $30,000. The rebate, which you can get if you finance through a bank or credit union, is $1000. Now let's plug into the calculator 4% as the annual interest rate, for a 5 year (60 month) loan.

If you plan on selling or trading in your auto before 21 months, then you would actually be better off taking the $1,000 rebate and getting the bank financing at 4.00%, rather than taking 0% financing through a dealer and no rebate. However, if you kept the car for the length of the 60 month loan, even after the $1000 rebate, you'd end up paying $32,045. Even without the rebate, 0% financing means you’d pay exactly $30,000 for your $30,000 car.

If only the auto industry would go for 'tastes great' and 'less filling'—a generous rebate and 0% financing.