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hopping for a new car? If you're in the market
and have decided to purchase rather than lease, you'll find several financing options. These days, more and more
dealers are offering low-rate loans or cash-back rebates.
While it's nice to have choices, they can be
downright confusing. And expensive. In the final analysis, you may be better off with conventional
auto financing from your credit union.
| "Hidden costs" in dealer financing options |
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• Dealers' low-rate loans and rebates almost always
are available only on slower-selling models.
These cars may have lower resale values.
• Dealers' low-rate loans can have bigger
prepayment penalties and can require
bigger down payments.
• Dealer financing plans usually are limited to
dealer stock. That means you may have to
sacrifice the color, style, and/or options
you want. Unwanted options can add 25%
to 30% to the sticker price of your car.
So, don't be smitten by auto dealers' low-rate advertising; visit your credit union
first to explore financing options.
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Plan A
The low rates that most dealers advertise are for short-term loans. For example, one dealer offers 1.9% financing,
but that's only available on two-year loans. A new $20,000 car with a $2,000 down payment (10% down) will require
financing $18,000. This translates to an astounding $765 monthly payment—out of reach for most buyers.
The same dealer offers other options, which become less attractive as the loan term lengthens. The dealer's three-year
loan has a 4.9% rate, while its four-year loan has a 5.9% rate, and its five-year loan has a 6.9% rate.
Financing $18,000 on your $20,000 car at the dealer's 5.9% rate for four years results in a monthly payment of
$422—a more realistic outlay for many consumers' budgets.
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Plan B
On the other hand, if you choose the dealer's rebate plan, you forego the low-interest-rate loan, but get a $2,500 cash
rebate. Adding the rebate to your down payment can make credit union financing very attractive—because the larger
down payment reduces the amount you need to finance.
So which alternative is best—taking the dealer's low-rate loan or the
credit union's loan with the dealer's cash-back offer? Use the calculator to
find out. Fill in all six fields before you hit calculate.
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