Suppose you’re looking for the lowest-cost financing deal on a new car and have a choice of several manufacturer incentives, including a cash rebate, low-rate loans and a lease. Figuring out which option is best can be a complicated calculation, according to Consumer Reports Money Adviser.
You need to arm yourself with the necessary tools to evaluate auto-financing deals. To help, Consumer Reports Money Adviser crunched the numbers on dozens of recent offers. It found that the cash rebate is often the lowest-cost option if you can finance at below-average rates, which are likely to be found at a local banks, credit unions or online lenders.
How deals stack up
To understand why taking the rebate is often the best choice, you need to look at why the other options typically cost more.
Leasing. In reality, leasing is just another form of financing. Whether you finance a $26,000 car with a lease or a loan, you’ll be borrowing $26,000, assuming no down payment. And you’ll pay interest on that amount, minus whatever you pay back.
When you take out a loan, you pay back the entire vehicle cost. But with a lease, you pay back only the projected loss in the vehicle’s value over the lease term, the so-called depreciation. That results in a much lower monthly payment, which is the reason leasing appears attractive. But it also leaves a larger amount that’s not paid back and is therefore subject to a finance charge every month. And though leasing means less out of pocket, it’s more expensive overall because you won’t own the vehicle after the lease is over, as you would with a car bought with a loan. Also, leases tend to have higher interest rates than equivalent loans.
Low-interest financing. For this option, the question is whether the savings from the manufacturer’s extra-low interest rate more than offsets the amount you’d lose by giving up the cash back. That can be the case if you take the cash and finance the car elsewhere at just an average rate. But if you shop carefully for a rate, as Consumer Reports Money Adviser did, you might get the best of both worlds: the cash and a competitive rate that, while not as low as what the manufacturer is offering, provides significant net savings over what you’d otherwise pay.
That doesn’t mean you won’t find instances in which low-interest financing or even a lease deal is the lowest-cost option. That can happen if an automaker is particularly aggressive with any of its offers. So it pays to check offers carefully. The only way to know for sure if you’ve got the best deal is to compare the numbers.
Doing the math
Once you’ve negotiated the vehicle price, the dealer can provide you with the total cost of each option. Or you can calculate it yourself by multiplying the payments by the number of months. Then add any pre- or post-deal costs not included in the financing, such as a down payment.
Don’t forget to include state sales tax. When you buy, the tax is typically on the entire amount, minus any trade-in. With a lease, it’s usually on the down payment and the monthly lease payment. But a few states have different rules, especially on whether tax is applied before or after the rebate is deducted.
If you want to calculate the total cost yourself, use an online calculator. Consumer Reports Money Adviser recommends the loan calculator at leaseguide.com/carloancalculator.htm.
Finally, keep in mind that any cost comparison you do is valid only if you keep the vehicle for the duration of the lease or loan. If you expect to trade it in early, say, during the second year of a six-year loan, leasing from the outset might cost you less.
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