Getting the best car deal: Which incentive is right for you?

Driving off the lot with a new set of wheels — immersed in that new-car smell with the open road ahead — sounds like a joyful experience. But rather than feeling happy, many buyers just feel stressed. Dealers' aggressive sales tactics can make you question whether you got a good deal. Even worse, salespeople can pressure you to buy a vehicle you don't want or need.

If you come to the dealership prepared, buying a new vehicle can exceed your expectations. You've probably already researched the big questions, like what car will best suit your needs and how much car you can afford. But there's another you likely haven't considered.

While you're at the dealership, you may be offered the choice between a vehicle rebate and a promotional interest rate. As with most finance questions, which one you should take will depend. Read on for the important considerations and how to balance them with your needs.

Car rebate versus lower interest rate

If you're able to pay cash for your new car, congratulations.

If you're like most people and aren't in a financial position to pay cash, you might be offered two options: a rebate or a promotional interest rate. Before you can evaluate which is best for you, it's helpful to know the difference.

A rebate is a vehicle discount that comes straight from the manufacturer, not the dealership. Rebates can be $500 or even more depending on the car.

There are two types of vehicle rebates: blanket rebates for anyone who purchases a certain vehicle or specialized rebates that target specific demographics, such as students or military members. You can apply the rebate to your down payment, or, in some cases, you may be able to get it in the form of a check after your purchase.

A dealer can offer you several different interest rates:

• Rates for a loan issued by a local or online bank or credit union.
• Nonpromotional rates offered by dealers. Sometimes the dealer can beat the rate your local or online bank offered. It's worth asking.
• Promotional rates offered only to "well-qualified buyers," which can sound something like "0.99% or 0% for 60 months," which can be from a manufacturer.

In most cases, you can get the rebate or the promotional interest rate, but not both. Read more about your options in our article, What you need to know about car loans.

How to decide which is better

The only way to know whether a rebate or a promotional APR is best for you is to do the math.

Example 1: Let's say you find a car that costs $25,000. The dealer offers you a $1,000 rebate or a promotional APR of 1.99% for 60 months. The rate you can get through a local or online lender is 2.99% for 60 months. Here are your potential outcomes:

If you take the $1,000 rebate as a reduction of the purchase price and finance the remaining $24,000 at 2.99% for 60 months, you'll pay $1,868.52 in interest, and the total cost of your car will end up being $25,868.52.

If you finance the entire $25,000 at the promotional APR rate of 1.99% for 60 months, you'll pay $1,285.08 in interest, and the total cost of your car will end up being $26,285.08.

As you can see, you'll save about $416 by taking the rebate, assuming you don't pay off your loan early, which changes the calculations.

Example 2: What if you purchase a more expensive vehicle and finance a larger amount? Will that change your decision? Let's do the math again, this time with a vehicle that costs $40,000. Here are your potential outcomes:

• If you take the $1,000 rebate as a reduction of the purchase price and finance the remaining $39,000 at 2.99% for 60 months, you'll pay $3,036.34 in interest, and the total cost of your car will end up being $42,036.34.
• If you finance the entire $40,000 at the promotional APR rate of 1.99% for 60 months, you'll pay $2,056.13 in interest, and the total cost of your car will end up being $42,056.13.

In this scenario, they’re almost the same, but you're still slightly better off taking the rebate.

If you plan to pay off your loan early, the calculations will be different than if you plan to keep the loan to term so that might change your decision.

Vehicle rebates can change.

Since rebates are tools that manufacturers use to level their supply and demand, rebates can be short-term promotions and, in some cases, even the dealership doesn't know when the manufacturer will change their rebates.

If you're still in the shopping phase and find a rebate for a car you like, make a note of its expiration date and remember that a change could shift your analysis.

For example, if you had your heart set on the $40,000 car from example 2, and the $1,000 rebate dropped to $500, the promotional APR could save you $519.14 in total payments.

Electric car incentives and rebates

With their sleek, minimalist design and innovative technology, electric vehicles, also called EVs, have appealed to a group of tech-savvy, cutting-edge buyers. Now, with higher gas prices and EV charging stations popping up even in grocery store parking lots, more people are looking to EVs as a viable option.

Fortunately for electric vehicle shoppers and buyers, more manufacturers are offering a variety of EVs. If you're in the market for one, consider your available incentives.

Start by checking out federal electric car incentives, such as tax credits for qualified vehicles. Some states also offer incentives, and some utility companies offer cash back or incentives for recharging electric vehicles during off-peak hours.

Not sure about how an EV could impact your taxes? Talk to a qualified tax professional for guidance.

In many cases, the benefits of driving an electric car surpass tax credits or gas savings. In San Antonio, where USAA is headquartered, vehicles displaying an authorized hybrid or EV placard can park at downtown street parking meters free of charge.

Whether an electric vehicle makes sense for you requires a different analysis. Start by thinking through your driving habits. Will the range of your vehicle allow you to meet most of your traveling needs? How does the cost of electricity compare with the cost of gas in your area? Don't forget to factor in the cost of the batteries, which will eventually need to be replaced.

Take your time.

The key when buying a new vehicle is to not rush it. If you're at a dealership and the salesperson is pushy or you're nervous about your ability to make the payments, it's OK to step back. You don't owe your loyalty to any particular dealership or vehicle manufacturer.

If you need more time to think through the offers, walk away. Here's an article that can help you double-check how much car you can afford. And here are a few ways to negotiate a great deal on your next car.

In the end, agonizing over the decision between a rebate and a lower interest rate doesn't matter if you're purchasing a car that significantly exceeds your means. Your goal is to buy a vehicle that fits your budget, meets your needs and helps you cruise into the best financial situation possible. Start your auto purchasing journey today by visiting USAA Bank's consumer loan calculator.