"Cash Back Car Deals" offer extra money when you take out a car loan. This is an incentive offered by a financer 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 cost will cost you, and also what kind of dent it will put in your savings. Some financers offer cash back with approved car loans. The words “cash back” create an alluring proposition, and you might instantly start to think about everything you could do with that extra money in your pocket. Is this 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 how well it suits your needs.
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 will 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 receive actual money, deposited into your bank account, but it’s not your only option. You should consider the components of the loan to see whether this gets you ahead financially or not.
There are ways in which you can benefit from a cash-back car loan. It all depends on how long the car loan lasts (the “term” of the loan) compared to what value there is on the car throughout the length of that car loan. That value is determined by how much the car is worth, and how much you are borrowing against it. A shorter term car loan will start providing equity much sooner than a long-term car loan.
Down payment: A common obstacle to getting a new car is not having enough for a down payment. A cashback car loan is one way to get around that, by using the cash-back towards your down payment. Remember to consider the car’s depreciation over time — not just from the moment you leave the car dealership — to ensure you’re choosing the right car and the right terms for your car loan.
Use the shortest possible loan term and the highest monthly payment (that is manageable for you) to keep the value of your car as high as possible, compared to how much you still owe on it. Try to find ways to reduce or pay down your car loan, especially if you find the car’s value dropping faster than what you still owe. This way, over time, you can save a lot on the interest.
Pay off higher interest debt: You can also use the cash back to pay down a debt or expense that has higher interest. Whenever you are in a situation where you are paying 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 5%, and you pay something that carries 24%, you’ll save interest. Remember though, you’re paying sales tax on the cash back, as it’s part of the car loan contract.
Car dealers or manufacturers are usually the ones offering 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 cashback 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.
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