"Cash back" car loans offer extra money when you take out a car loan. This is an incentive offered by lenders to motivate a car purchase. But is this type a loan a trap? Or, is it actually a good deal? Let’s review the fine print.
When you’re considering getting a new(er) car, the first thing you’ll consider will be how much it will cost you and also what kind of dent it will put in your savings. Some financers offer cash back rebates with car loans.
The words “cash back” create an alluring proposition; you instantly envision everything you could do with that extra money in your pocket. But is this offer just a sales tactic, or can you really come out ahead?
While cash back offers on cars are a sales tactic, several key factors will determine how worthwhile it is for you. In this article, we’ll answer some frequently asked questions about cash back car loans to help you decide if it's right for you.
Like so many Canadians, when you buy a car, you’ll likely choose a car loan to pay for it. In order to boost sales, some financers advertise an enticing loan offer that includes cash back.
It may sound as though this type of loan will reduce the cost of your car. In fact, it offers more than you require for the cost of the car with extra credit that you can turn into cash.
For example, if your newer car will cost $13,000, and your cash back is $2,000, your new car loan is now $15,000.
You can use your cash back rebate on whatever you like, but remember, it's not free money. However, there are ways that you can come out ahead financially. Here's how you can leverage a cash back car loan to your advantage:
Down payment: A common obstacle of buying a new car is not having enough for a down payment. A cash back car loan is one way to get around that; you can use the rebate towards your down payment.
With the reinvestment of the rebate as a down payment, you'll enjoy lower monthly payments compared to a zero cash down agreement. It might be tempting to drive off the lot without paying a dollar upfront, but when you owe more than the car is worth (thanks to depreciation), it could end up costing you a lot down the road.
Our advice? Use your cash rebate for the down payment to enjoy savings in the long run.
Pay off higher interest debt: If you get a substantial rebate, you might also be able to pay down a debt or expense that has higher interest. Whenever you pay an interest rate that is higher than your car loan interest rate, it may be a good idea to pay off that debt with the money you get as cash back. For example, if your cash back car loan has an interest rate of 14%, and you pay off a different debt that carries 24%, you save.
Remember though: you do have to pay sales tax on the cash back, as it’s part of the car loan contract.
Manufacturers usually offer cash back car loans. This is mainly because they have particular cars they want to sell first, so they bring customers in with an extra incentive; you might see this nearing the end of a slower month, or at the end of a model year. A word to the wise: you may be able to negotiate a good deal for yourself; a cash back offer may signify that the financer is eager to get those cars off the lot.
Lending institutions also offer cash back car loans, either for a new(er) car, or to refinance your existing car loan. There may be times when you suddenly need to reduce your monthly payments, and extend your car loan (which would incur more interest). This could help you keep your credit score up, if you’re undergoing financial stress. It is still better to go this route than to default on one, or more, of your loans.
Although it is very rare, car dealers may have cash back offers along with reduced car loan interest rates. Most of the time, you must choose one or the other. Which leads us to our best tip to find a great cash back financing deal: look for someone offering both!
As discussed, there are advantages with a cash back car loan, but there are disadvantages too. Remember that the downsides are the kind that might affect your finances, such as paying interest and sales tax on the cash back. In some cases, your credit score could be affected since your debt load has increased.
Educating yourself about car finance is the best way to find the best deal for you. Canada Drives can help you secure the best financing option quickly and easily. We put your peace of mind first, helping you get approved for finance before you’ve even set foot inside a dealership. Our online application takes less than two minutes, and our quick approval can have you driving away in a new car as early as tomorrow.
Hopefully, this article has demystified some of the unknowns surrounding car loan financing. If you’re interested in learning more, read other articles from our Fact or Fiction series. In one article, we look into 0% interest car financing to give you the facts, and in another, we provide a comprehensive breakdown of no credit check loans. We also delve into the details of zero down payments.
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