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Column: Shop around for financing

Rebate or lower rate?

That’s the question that buyers of cars, particularly new cars, frequently confront when they’re making a purchase.

Often, that decision is made at the last minute, in the dealership office, with the pen in hand and the papers on the desk. Rebate or lower rate? Which one makes the most sense?

In many ways, it’s a nice problem to have. The car seller is offering you an incentive to buy and has two ways you can benefit. But which one is better? The best decision depends on your specific needs and financial situation, of course.

But I’ve seen too many buyers opt for the rebate, the money off the top, and fail to realize that they will end up paying that back — and maybe even paying more — in a higher original price or in interest costs over the lifetime of the loan. The rebate looks so good and is so immediate that it can blind the buyer to the better deal in the long run: a lower rate and lower overall price.

What’s more, the best interest rate may not even come from the dealer. With rates so low and banks looking for good loan customers, many car buyers can get a better rate on their own if they shop around before they make a purchase. Your lender may be able to consolidate your purchase with other debt and improve your financial picture. Tax deductibility may even be an option by tapping your home equity.

This could allow you, as a car buyer, to have the best of both worlds — a rebate from the dealer and a great rate from an outside lender of your own choosing.

But it means that you should do what we strongly suggest for anyone contemplating a big purchase such as a house or a car within the next year. Stop in at your local bank. Get to know a lender. See what’s available. Let us make you an offer.

We’re happy to show prospective customers the best borrowing structure for them. We’re also flexible, so you can act quickly if the right deal comes along. Ideally, we’ll get you pre-qualified for a loan so you’ll be ready to go when you want to buy. That way, you can purchase without last-minute worrying about whether you’re making the best financial decision.

Here’s another, little-known fact to consider when buying a car. Many dealerships will tell you that they have relationships with several lenders and can send your information to all of them to give you a choice of loan options. There’s no need to go any further than their offices to find the loan with the lowest rate, it seems.

But when the dealer submits your loan information to multiple lenders seeking that best deal, this will lower your credit score. Multiple applications, including a blanket search for the best rate, has that effect.

The impact eventually goes away. But assume you are interested in buying a car, submit loan applications to multiple lenders and then decide not to buy. All you have done is lowered your credit score, making it more difficult to get a loan if you do decide to buy soon.

It’s much smarter to shop around for financing before you buy. Get your lending options figured out and develop a relationship with a lender you trust. A reputable lender is more than happy to put in the time and effort to help you. If your lender won’t do this, find another lender.

With a little preparation before you purchase, you can make the best decision about your loan without putting yourself under pressure, potentially regretting your choice and damaging your credit score.

And when the question arises — rebate or lower rate — you can get the best answer.

Dale Lewis is president and CEO of Park State Bank in Duluth. You can reach her at president@parkstatebank. com or (218) 722-3500.