How To Know If 0% APR or the Rebate Is Better When Buying a Car

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Drivers across the country have put off buying cars for more than a year because pandemic prices reached historic highs and stayed that way. Along the way, buyers saw once-common dealer and manufacturer incentives dry up. 

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But now, with evidence that the market might be starting to loosen, there’s hope that the auto industry will start offering lucrative cash rebates or 0% APR deals once again. When that happens, which should you choose if an offer like that is attached to a car you like? 

Here’s what you need to know to make the right choice. 

Find Out If You Qualify — If Not, the Decision Makes Itself

Car dealers make their money in the financing office, so 0% APR is a truly excellent offer — but if you read the fine print, you’ll notice that it applies only to those with truly excellent credit.  

If your credit score recently broke through the elusive 700 barrier after languishing in the high-600s, good for you — but even that’s probably not enough to qualify for a 0% APR deal. According to Forbes, you’ll probably need a credit score of at least 720, which is where FICO says the “excellent” credit range begins. But FICO scores go all the way up to 850, and the higher you climb, the better your chances. According to Equifax, 740-799 is generally only considered “very good,” with excellent starting at an enviable 800. 

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It will vary by deal and by dealer, but they’re not kidding when they say “for well-qualified buyers only.”

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Do the Math

If you do qualify for the 0% APR deal, the next step is to use an auto loan calculator like the one from Cars.com to compare the cash rebate to the value of the zero-interest offer.

If the car you’re buying costs $30,000, for example, and you put 10% ($3,000) down, you’d be financing $27,000. Presuming an interest rate of 4.0% and a term of five years (60 months), you’d pay $2,835 in interest for a combined car price of $29,835 over the life of the loan and a monthly payment of $497. 

If you took the 0% APR deal, you’d pay no interest and repay only the $27,000 principal. Your monthly payment drops to $450. 

Presuming a cash rebate of $1,000 tacked onto the down payment — which rebates usually are — you would finance only $26,000 and pay $2,730 in interest. 

One thousand dollars is a hefty rebate, but it pales in comparison to the $2,730 you’d pay in finance charges. The 0% APR offer is better in this case — and it would still be better even if the rebate doubled. Presume you score a $2,000 rebate, which is highly unlikely for a $30,000 car even in normal times. You’d still pay $2,625 in interest, leaving you in the hole for $625 over the life of the loan.

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Weigh the Variables

The hard math that emerges from the auto loan cost-comparison calculator is a good starting point, but you have a few other considerations to chew on. 

For example, if you reduced the term from 60 months to 48 or 36 months, you’d pay much less in finance charges over the life of the loan. That makes the cash rebate look much more attractive. 

On the other side of the coin, if you took the APR offer, your monthly payments would decrease, which means you might be able to pay more than the minimum every month and eliminate the debt sooner. 

Edmunds offers a more comprehensive car loan calculator designed specifically to help you decide between a low APR offer and a cash rebate. The calculator includes variables like sales tax, the value and amount owed on your trade-in, and title and registration fees, which allows you to compare the options in much greater detail.

Same as With Everything, There Are Pros and Cons to Each

The right thing to do depends on the details of your unique situation, but both options come with their own sets of benefits and drawbacks. 

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Generally, 0% APR deals lower your monthly payments and let you dodge hefty long-term finance charges, but you have to have excellent credit and meet strict qualifying standards to take advantage of them. 

Cash rebates aren’t attached to credit requirements and they can reduce the amount you need to borrow by boosting your down payment. The tradeoff is that they rarely match the savings of 0% APR deals on all but the shortest loans. 

One universal drawback is that both rebates and 0% APR deals are generally limited only to select models.

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About the Author

Andrew Lisa has been writing professionally since 2001. An award-winning writer, Andrew was formerly one of the youngest nationally distributed columnists for the largest newspaper syndicate in the country, the Gannett News Service. He worked as the business section editor for amNewYork, the most widely distributed newspaper in Manhattan, and worked as a copy editor for TheStreet.com, a financial publication in the heart of Wall Street's investment community in New York City.
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