How to Decide Between a Cash Incentive & a Special Financing Rate

Many manufacturers offer consumers a choice between a cash incentive or a special financing rate on new vehicles, such as $1,500 cash back or 3.9% financing for 5 years.  Which is the better deal?  The following guide will show you how to tell.

Step 1: Look up available incentives.
When shopping for a new car or truck one should always research what incentives are available on it prior to entering into negotiations with dealers.  Knowing about all of the special offers that are available on a vehicle will put you in a stronger position during your negotiations.  Check out the following section of Edmunds.com to see a list of the incentives that are currently available, Edmunds.com - New Vehicle Incentives.

Step 2: Calculate what your payment would be using the special rate.
Once you know what special financing rates are available on the model that you are interested in, decide how long you want to finance it for and calculate a finance payment on it.  You can calculate your payment by using one of the many finance calculators that are available on-line, like the one right here at Edmunds.com: Basic Loan Calculator.

Step 3: Find out what sort of rate you will have to pay to finance your vehicle if you choose not to use the special rate.
Now look around to try to get an idea of what sort of interest rate you would have to pay to finance the truck that you want through an independent bank.  You can get an idea of what sort of interest rate to expect by visiting a site like bankrate.com, or by simply calling your local bank or credit union.

Step 4: Calculate what your payment would be if you were to finance through an independent bank.
Repeat the process that is outlined in Step 2, but now using the interest rate that you would have to use if you had financed your vehicle through an independent bank, the one that you will have to pay if you choose not to go with the special rate.

Step 5: Calculate the total cost of your vehicle using both rates.
Now that you know what your monthly payment would be using both the special and non-special interest rates, multiply them by the number of months you are financing for to find out the total cost of both loans.

Step 6: Calculate the savings provided by the special rate.
Subtract the total cost of financing through the special program from the total cost of financing through an independent bank.  The difference between these two numbers will be the total amount of money that you will save over the life of your loan if you go with the special rate.

Step 7: Compare the savings to the cash incentive.
If the amount of money that you will save by taking advantage of a manufacturers' special financing program is greater than the cash incentive that is available on it you should seriously consider going with the special rate.  Keep in mind though that if you don't hold onto your vehicle for the entire length of your loan you will not realize the complete benefit of going with the special rate.  For example, a 0% interest rate on a 5 year loan is very attractive, but it might not do as much for you as several thousand dollars cash back if you only plan on holding onto your vehicle for a year or two.

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