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Zero
Percent vs. Rebate
Frequently
during conversations with clients, we hear them express
confusion over which is better: the zero-percent finance
rate or a rebate up front. Broken down into its simplest
form, this "either or" option represents two
sides of the same coin. If you're having a hard time
figuring out which option is best for you, here's our
best generic advice: If you're a "keeper"
(planning to keep the car for the duration of the note),
you'd probably be best served with the zero-percent
rate. If you're a "trader" (likely to trade
the car well before the end of the term of the loan),
you'd probably be better off taking the rebate.
Sample
Let's consider that a $33,000 vehicle is offered with
a choice of either a $3,000 rebate with 6% interest
or zero percent interest with no rebate. With either
rate the length of the loan is five years, or 60 months.
Rebate
If you take the rebate (applying the $3,000 toward the
total price of the car, as your down payment) and finance
the remaining $30,000 at 6 percent for 60 months, your
monthly payment would run somewhere around $600 per
month.
Zero
Percent Interest
If you take the zero percent interest rate, in lieu
of the rebate, and finance the entire $33,000 amount,
your payment would run about $550 per month (saving
you $50 a month in payment amount, which translates
into $3,000 over the life of the loan).
You're
going to receive roughly the same $3,000 savings either
way. It is the way those savings are delivered that
needs to be considered carefully.
"Keeper's
Advantage"
If you keep the car for the duration of the loan, you're
better off taking the rate as it allows you to benefit
from a lower payment (in this example, saving $50 a
month for sixty months). However, if you trade before
the term expires you'll lose that $50 a month savings
for each month of the term. For example, if you trade
24 months into the note, you'll lose $1,800 (36 months
times $50) of the total $3,000 incentive.
"Trader's
Advantage"
If you typically trade every two years or so, you're
better off with the rebate that effectively goes into
your pocket up front. No matter when you trade, you've
benefited from the incentive.
Another
factor to consider is the amount still owed on the loan
come trading time. Those taking the rebate may owe a
little more on the same vehicle than would those taking
the zero percent rate. For an exact analysis of how
the various sales incentives break down and how they
may affect your next purchase, please contact us. We
can explain your options in greater, more personalized
detail.
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