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Car dealers are known to try all sorts of methods to get your signature on that loan application. To the point of giving you cash to entice you to drive away with a brand new car?

19 Feb 2010 | Category: Car Buying Advice


A wise man once told me (I've heard this more than a few times), "If it's too good to be true, it probably is". From dodgy business proposals to easy money schemes, this rule has proven itself true more than a few times in my young existence. So when I heard about how dealers these days are offering cash rebates that you could use to either offset the car's list price or use to pay off the first instalment and insurance, I was skeptical.

Now, I'm sure most of us will find the ads in the papers very enticing when dealers are advertising cars with $10,000 or even $20,000 cash rebates. But the astute consumer will immediately realise that no banks are in the business of giving away money for nothing.

Even the ads themselves seem a little dodgy. For one, the cash rebates that are offered comes from the bank directly and is meant for the borrower. But some dealers choose to use this cash rebate to offset the list price of the car to enable them to advertise a lower selling price in their ads compared to their competitors (who advertise without applying the cash rebate to the price). Not only is this unscrupulous, the borrower/consumer doesn't get a single cent of his/her cash rebate at the end of the day.

This brings us to 'price before cash rebate' and 'price after cash rebate'. 'Price before cash rebate' simply means the car's selling price before the bank's cash rebate is applied to it. For example, let's say Model X car's list price is $80,000 before cash rebate. Apply the bank's cash rebate of $10,000 to the price and the 'price after cash rebate' will be $70,000.

Soon as you hit the showroom floor, you will realise that in order to be eligible for the price after cash rebate, you will have to fulfil two conditions. One, you will be required to take a full loan for the car you intend to purchase. Secondly, the interest rate will be significantly higher with the cash rebate loan scheme.

If you think about it, this is a very nifty way of getting consumers to feel like they're walking away with a good deal. When in reality, all they're really getting is the money they'll be servicing the bank interest with up front.

How is this bad in the long term? Firstly, depending on the length of your loan, you might experience severe difficulty in getting your car changed two to three years later. Considering that you will have to cough up a significant amount of cash up front to settle the outstanding loan. Which means this type of loan is unsuitable for those who don't foresee themselves keeping the car for the duration of the loan.

However there are consumers out there who will find this type of loan useful. For example, if I'm a savvy investor, I would much rather spend the minimum amount possible on my car. Which means taking a full loan for the maximum amount of time while I invest the bulk of my cash in stocks or other equities. If I'm lucky, the burgeoning profits from my other investments would be more than adequate in servicing the loan.

On a closing note, do consider carefully the pros and cons highlighted in this article before taking the plunge. There is no such thing as money for nothing™unfortunately.
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