A new car is one of the most important purchases most Americans ever make and, perhaps, one of the most confusing. As car manufacturers seek to clear dealer lots and make room for new stock, customers are bombarded by deals offering financing with low to zero annual percentage rates or hundreds of dollars cash back.
How can you sort through these deals and make a purchase that works out best for you? Experts say the most important thing is to prepare yourself in advance, by researching deals, comparing prices and financing sources and knowing your financial limit.
When trying to decide between a low financing deal or a manufacturer's rebate, it is important to calculate which deal results in the most money saved.
"Usually the cash back works out better for people with good credit because they get a good APR anyway," said Michael Alesandrini, sales manager of Antwerpen Chevrolet in Randallstown.
At the same time, a buyer with shaky credit probably will not qualify for the low financing deal, while the rebate offer is available to any buyer, he said.
When calculating the value of both offers, it is important to remember that the price of the car subject to Maryland's 5 percent sales tax doesn't take the rebate into account. A buyer would pay $825 tax on a $16,500 car offering a $1,500 rebate, not the $750 that would be assessed on $15,000. If the rebate is small and the low financing deal is available, the financing could work out to save a buyer more money.
But Kevin Condon, partner with Baltimore-Washington Financial Advisors of Ellicott City, warns against jumping on either deal without reading the fine print or comparing it to other deals.
"It's a gimmick to get people to come buy a car and make them think they get a great deal," Condon said. "In our experience, people don't give money away, especially car dealers. You can't loan money at 0.9 percent or whatever, nobody can. The cost of the money is built in somewhere."
If the manufacturer or dealer is offering low to zero APR, they are assuming a loss of whatever interest that money would accrue if it were in a high interest-bearing account, Condon says.
By comparing the quoted price to the price another dealer is offering on the same or a similar car, a buyer can tell if extra cost is added to account for the low financing or cash-back offer.
Joanne Hamilton, educator with the University of Maryland's cooperative extension outreach program, points out that low financing car loans are often short term, only 24 or 36 months. A $15,000, 24-month car loan with no interest equates to $625 per month in payments, which may be higher than many people can afford.
While Condon says that a buyer who comes in with cash has a better chance of grabbing the dealer's attention and negotiating a better price, Hamilton warns against straining your budget to buy with cash.
If you have available cash, "You want to look at where that money could make the greatest impact for your family," she said.
It may be better to pay off high interest credit cards or other debt, or to allow your money to grow by saving and investing, Hamilton said.
She also warns against purchasing a car with a home equity loan.
"If I have a traditional car loan and I have a sudden drop in income and can't make the payments, they can begin repossessing my car. If I buy my car with a home equity loan, it's my house that I've put on the line."
Hamilton advises buyers not only to compare car prices at other dealerships and on the Internet and on similar vehicles, but also to compare all available financing deals through banks, credit unions and savings and loans before purchasing.