In: Finance
how do you choose between a low interest rate and a rebate
Low interest rate: is an offer wherein the interest rate on a
loan is lower than the normal rates offered.
Rebate: is an offer or rather a one-time rebate that is deducted
from the purchase price.
Now, a rebate will reduce an upfront purchase price, while low
interest financing lowers the monthly payment. However, the best
option depends on a various factors -
Purchase Price
The amount of rebate
The interest rates offered
Further, it also depends on one's financial situations and goals.
Most offers allow you to choose either low interest financing or a
rebate, but not both. Hence it becomes important to choose between
the two options.
To understand this better, let's assume an example. Suppose that
you are buying a car with a 60 month horizon and the dealer offers
the following options :-
a. Rebate of $2,500 with 7 % financing or
b. A low interest rate of 3 %.
The vehicle purchase price is $20,000.
a. Rebate = $2,500
Total Borrowed = $20,000 - $2,500 = $17,500.
Rate = 7%.
Monthly Payment = $346.52
Total = $346.52 x 60 =$20,791.20
b. Total Borrowed = $20,000.
Rate = 3%.
Monthly Payment = $359.37
Total = $359.37 x 60 = $21,562.20
So, with low interest rate financing, even though you are paying
low interest on the loan, you end up with a higher monthly payment,
and you pay $771 more over the life of the loan because you borrow
more money.
Hence generally the decision depends on the amount of money that is
being borrowed, but it depends on the other factors as well that
have been mentioned above. Therefore, it is advisable to take the
decision after doing the relevant calculations.