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Serving members worldwide since 1935.
Henry MolinaWritten by:
Henry Molina
Lafayette Federal Credit Union
Vice President, Business Development


Are you thinking about buying a new ride sometime soon? A safe, reliable mode of transportation can come with a hefty price tag, but it’s an expense many of us simply can’t live without.

Consumers often search for ways to maximize any savings and/or discounts for this major purchase. Two enticing offers available in the marketplace include manufacturer rebates and 0% financing. Oftentimes, you need to select between one of these two options. Both can help you save money, but they each have important caveats you should understand ahead of time. With a little knowledge and research, you can decide which option is best for you as you begin the process of buying a car.

What is 0% Financing?

"Financing” means borrowing money — or taking out a loan — that you’ll pay back over a period of time in order to make a big purchase, such as an automobile.

You’ve probably seen the term "APR,” or annual percentage rate, in countless advertisements for new vehicles. APR refers to the interest rate — the cost of borrowing money — including any fees. The lower the APR, the less additional money you’ll end up paying over time.

An APR of 0% — or 0% financing Opens in New Window— means you don’t pay any interest on the money you borrow. Sounds like a no-brainer, right? Read on to find out why this may not always be the case.

For instance even though advertised widely, 0% financing isn’t readily available to everyone. In order to qualify for this type of loan, you need to have a pristine credit score. The exact qualifications will depend on the lender, but generally, you’ll need a minimum score of around 780.

If you are fortunate enough to qualify, you should next understand the pros and cons of going with this type of financing.

Pros and Cons of 0% Financing

As good as a 0% financing option may sound, there are both pros and cons to going this route when buying a car. Below are ones to consider:

Pros:

  • You could end up paying less for a new car. If you have excellent credit and avoid added costs that sellers may try to tack on, you can avoid the cost of borrowing money.
  • You could pay off your loan quicker. Typically, when you borrow money, you have to pay back the principal and the interest. This raises your monthly payment. If you only have the principal to pay, you can pay more each month and pay off the loan sooner.

Cons:

  • Your choice of vehicle may be limited. 0% offers aren’t valid on just any vehicle. They may be offered on models that are overstocked, for example.
  • 0% financing is usually only available for new and (sometimes slightly used) vehicles. If you’re not in the market for a new or almost-new car, this option probably isn’t for you.
  • You may have to agree to a shorter auto loan term to qualify for 0% financing. This means that the time you have to pay back the loan will be shorter than standard terms offered by other lenders. You should be certain that you can afford the resulting higher monthly payments.
  • Promotions for 0% financing are limited-time offers (lasting about a month on average).

What is a Manufacturer Rebate?

A rebate is another type of financial incentive that can save you money when purchasing a vehicle. By definition, a rebate is an amount of money returned to the buyer after making a purchase.

Think of a car rebate as a discount or even cashback on a car. Sometimes, you can apply a rebate to the directly to the down payment of your vehicle purchase.

Similar to 0% financing offers, rebates are offered by auto manufacturers, not dealerships. They may also have strict qualifications on who can get a rebate. Some limitations might apply — for example, you may be required to:

  • Finance your vehicle through the manufacturer’s financing company
  • Pay cash for the vehicle
  • Already own or lease a vehicle from that particular automaker
  • Choose a vehicle from a dealership’s existing inventory

Of course, you’ll want to find out exactly what the rebate covers and when and how exactly you’ll receive it.

Pros and Cons of Rebates

Like 0% financing, rebates sound like a great way to pay less for a new car. But — also like 0% financing — there are pros and cons to consider.

Pros:

  • You don't have to have stellar credit to qualify for a rebate. While there are other restrictions, having a minimum credit score isn’t one of them.
  • You can lower the final price of the vehicle with a rebate, potentially paying less overall. If the rebate applies to your down payment, your loan amount will be reduced.

Cons:

  • Rebates are usually only offered on purchases of new cars. If you're not planning to buy a new car, you probably won't qualify for a rebate.
  • You're limited on your choice of vehicle when it comes to getting a rebate. You might not get a rebate on the car you were hoping to buy — instead, you may have to be flexible.
  • If you don't qualify for a good interest rate on your loan, you may end up paying more overall down the road, even with the rebates applied.
  • Rebate promotions usually only for a limited time.

Which Option is the Best for Me?

Like many financial decisions, the best option for you depends on your situation and priorities. But there are steps you can take to figure out which option is best for you.

Step 1: Figure out your credit score

The first step in choosing between 0% financing and a rebate offer is figuring out your credit score. If you don't have a credit score that’s at least 700 (or even closer to 800), you may not qualify for 0% financing. If you determine that you do not qualify, you can go ahead with the rebate and shop around for the lowest interest rate you can find. If you do have an excellent credit score, then 0% financing remains an option for you.

Step 2: Review all qualifications for 0% financing

As we mentioned above, an excellent credit score is just one of the criteria you need to meet to qualify for 0% financing. Review the terms for the offer to make sure you meet them. For example, what is the auto loan repayment period? If it's a shorter-term, can you make the monthly payments? Are there application fees or prepayment penalties? Do the vehicles with these offers meet your needs, wants, and — most importantly — budget?

Step 3: Review rebate terms and qualifications

What are the terms of the rebate you're considering? Can you get the vehicle you want with a rebate? Will the rebate be deducted from the price of the car before taxes — which could end up saving you even more money — or after taxes?

Step 4: Calculate costs for both options

Use an auto loan calculatorOpens in New Window to figure out your monthly payments for each option. You'll also want to figure out the total amount you'll end up paying for the car. To crunch the numbers, you'll need the following information: the loan repayment term, the APR, and the total cost of the car — in the case of the rebate option, remember to deduct the rebate from the price of the car.

The best option might not be the same for everyone — it depends on your personal financial situation and the type of vehicle you want to buy. To get the best deal, you’ll have to investigate your options thoroughly and calculate the actual costs.

Let Lafayette Federal Help You Get Your Best Deal

Oftentimes, it makes more sense to take the rebate and finance your car through a credit unionOpens in New Window. Credit unions can offer lower interest rates over longer repayment periods, which means you can typically have a lower monthly payment than if you were to take a shorter-term 0% financing deal. Also, credit unions don’t charge loan application fees or prepayment penalties. With the bonus of a rebate, financing through a credit union can be a very affordable option.

We provide competitive auto loan rates and terms in the Washington, D.C. metro area. Presently, we offer loan terms up to 84 months and APRs as low as 2.375%Opens in New Window. We also offer financing up to 125% (based on the Automobile Invoice Service Manual’s appraised value) on any previously unregistered or untitled vehicle purchased from a licensed dealer. Members are also eligible for the Green Auto Loan discount, which offers 0.125% percent off on U.S. EPA-designated Smartway certified vehicles. Additionally, we have a lot of helpful resources in our Learning Center Opens in New Windowto help navigate you through the car-buying process. Interested members can contact usOpens in New Window or stop by one of our branch locations where a Member Service Representative can assist.

Not a Lafayette Federal member yet? You can become a member by completing an online membership applicationOpens in New Window.

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