The Value in Getting Cash Back on Your Auto Loan
By: Chad Gramling
Posted on Monday, July 14, 2014
Last year, we at 3Rivers made a decision to no longer accept applications submitted by auto dealers on behalf of buyers.
As technology has evolved to include online and mobile applications, more familiarity with the pre-approval process and a branch presence like no other financial institution in our market, this decision is allowing us to better fulfill our mission of helping members with money matters through sound advice and personal investments in those we serve.
Our members historically sought the ability to apply at a dealership as a matter of convenience. And we were happy to meet that demand, but it came with an expensive infrastructure that meant members forfeited some value that they might have otherwise had.
Take our new 1% cash-back offer for instance. Not only do members not have to make a payment during the first 45 days of the loan, but since 3Rivers has defrayed much of the costs associated with dealer financing, we’re able to put that money right back into our members’ pockets.
This benefit contains a lot of value that goes beyond what you see on the immediate surface. In fact, you’ll no-doubt find rates that might be a little bit lower that what you’re offered at 3Rivers. You’re all smart shoppers. We get that. And if it were only a matter of rate, you’d be wise to at least look at those other options. But let’s take a deeper look at why you might want to think twice before you do:
Here’s a hypothetical example that assumes a loan of $12,000 over a 5-year (60-month) term. The rate you are offered at Institution ABC is 1.85%. At 3Rivers, the same loan comes with a rate of 2.49% AND a 1% cash back offer.
So, you now have 2 options:
A.) a rate of 1.85% and no cash back; or
B.) a rate of 2.49% AND 1% cash back
The breakdown on that looks like this:
$12,000 over 5 years at 1.85%=$209.55 per month
$12,000 over 5 years at 2.49%=$212.92 per month
That’s a difference of $3.37 per month ($202.20 over the course of 60 months).
But remember, you have cash coming back…
The average length an auto loan is kept is 30 months (about half the 5-year term). This happens because people often pay off their loans early (and there is no early payoff penalty at 3Rivers), sell their cars, have accidents, trade in for new cars (and loans), refinance, etc.
If you keep that $12,000 auto loan for 30 months (instead of 60), the lower rate option would save you $101.10 in payments. But the cash back option would pay you $120 up front with no need to wait on the savings over the life of the loan.
So, which option should you choose? First, ask yourself:
- How long will I keep this car/loan? - Consider how early you might pay it off or trade in your vehicle.
- Do I prefer cash back now or a much smaller amount (barely enough for a once a month latte’) over a longer time?
- Would I be able to use that “instant savings” for other opportunities to save money or pay down debt?
So what’s your situation? If you’re ready to pursue the funding process, get your auto loan in a breeze at 3Rivers.