Question

In: Finance

how do you choose between a low interest rate and a rebate

how do you choose between a low interest rate and a rebate

Solutions

Expert Solution

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.


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