Cash Back Or Low Interest Calculator

Manufacturer incentives on a new vehicle are normally offered as a choice rather than a package: either a cash rebate applied against the price or a subvented finance rate well below market, but not both. Comparing them requires computing total cost under each path. Taking the rebate reduces the amount financed but leaves the loan at the lender's standard rate, while the promotional route finances the full price at something like 0 to 2.9 percent. Each monthly payment follows the standard annuity formula, payment equals principal times r divided by 1 minus (1 plus r) raised to the power of negative n, where r is the APR divided by 12 and n is the term in months. Which option wins depends on the spread between the two rates, the size of the rebate relative to the amount financed, and the term. Longer terms favor the low rate because interest has more months to accumulate, while a large rebate on a modest loan balance favors the cash. As a rough guide, a 3,000 dollar rebate on a 30,000 dollar loan is worth about 10 percent of principal, which usually beats a few points of rate reduction over 36 months but frequently loses over 72 months. Two caveats matter: subvented rates are typically restricted to the shortest terms and to buyers in the top credit tier, and a rebate can also be applied as additional down payment, which changes loan-to-value and gap insurance considerations.

Vehicle financing incentives grew out of the captive finance company. General Motors established the General Motors Acceptance Corporation in 1919 to lend to dealers and retail buyers, and Ford Motor Credit followed in 1959. Because the manufacturer controlled both the vehicle price and the lending arm, it could subsidize the interest rate as an alternative to discounting the sticker. Buying down a rate cost the manufacturer a lump sum paid to its finance subsidiary, which made rate subvention and a cash rebate economically interchangeable from the factory's point of view. The modern either-or promotion dates to the 1980s. In 1981 Chrysler and its competitors used cash rebates aggressively to clear inventory during a severe sales slump, and by the mid-1980s manufacturers were advertising headline financing rates as low as 2.9 percent as the alternative to a rebate. The trade-off became a fixture of United States new-car advertising, and how it must be disclosed is governed by the Truth in Lending Act of 1968 and Regulation Z, which require advertised credit terms to state the annual percentage rate and the conditions attached. Zero percent offers appeared prominently after September 2001, when manufacturers used them to restart demand, and they have recurred in every subsequent inventory glut.