The most common deals that car commercials advertise are cash-back and low-rate or zero-percent APR. Cash-back deals are self-explanatory, but what is APR? To help you decide which option is better for saving you money, here’s an explanation of APR is and why zero-percent is considered a good deal.
Buy or Lease: Which option is a better deal on a new car?
APR is an acronym for “annual percentage rate,” referring to the interest rate you’re charged by a lending institution when you borrow money to finance a purchase. So, whenever you finance a new vehicle, your loan will involve a set APR rate that determines how much you’ll pay in interest every month until you repay the principal (the remaining balance). The lower the APR rate, the less you’ll pay in interest every month and overall.
Zero-percent APR thus means that you won’t pay extra money on your purchase for lending interest fees; what you owe goes entirely to the borrowed amount. Automakers (not the car dealerships) offer this deal if you finance through them instead of with a third-party bank or credit union — that’s the only way they can guarantee a specific lending rate.
This sounds like a great deal, and it typically is — for people who qualify. There are typically constraints on this deal that prohibit it from applying to everyone regardless of credit or loan term. Typically, zero-percent APR is only for “qualified” buyers, which means you need a high credit score. If you do qualify, you’ll have to follow the terms outlined in the contract. This may involve a short loan term, like only 36 months, or the zero-percent rate will increase to a higher APR after an introductory period.
When deciding if cash-back or zero-percent APR is the better option for you, make sure you crunch the numbers and see which will save you more money based on how much you can afford to pay on the loan each month and how quickly you intend to pay it off.
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Aaron is unashamed to be a native Clevelander and the proud driver of a Hyundai Veloster Turbo (which recently replaced his 1995 Saturn SC-2). He gleefully utilizes his background in theater, literature, and communication to dramatically recite his own articles to nearby youth. Mr. Widmar happily resides in Dayton, Ohio with his magnificent wife, Vicki, but is often on the road with her exploring new destinations. Aaron has high aspirations for his writing career but often gets distracted pondering the profound nature of the human condition and forgets what he was writing… See more articles by Aaron.
