Your guide to all those “incentives” offered by car dealerships
You’ve probably seen the ads — “$3,000 bonus on this model,” “0% financing on this model” — maybe those ads even prompted you to go to your local dealership to check them out. If so, you are not alone. These attractive discounts are known in the industry as “incentives”, ways to reduce the cost of buying or leasing a new vehicle to entice you to buy.
Automakers typically place incentives on older models or slow sellers; included in the list of types of incentives are cashback offers, special interest rates, and leases. The advantage for you is that these incentives can allow you to achieve significant savings. However, there are a few important details to consider.
Types of Incentives for New Cars
Cash customer refund
The simplest form of incentive is cash back, a dollar amount applied to the price of a vehicle, which reduces its cost of buying, financing, or leasing it. These rebates, sometimes called “cash back” or “bonus cash”, are generally offered on a regional or national scale, but also in special circumstances; for example, for regular buyers of a brand (“loyalty cash”), buyers who have left a competing brand (“conquest cash”), as well as first-time car buyers, the military and young graduates.
Low interest financing
Generally, the better your credit, the lower the interest rate on your car loan. For those with excellent credit, car manufacturers offer loans with low or even no interest rates on specific vehicles, usually only those in stock at the dealership. How can they afford to do this? It’s simple, really. The loans are offered (and subsidized) through a ‘captive’, a finance company controlled by automakers. Although many of these offers are for 60-month loans, some of the lower rates may require very short payment terms (12 or 24 months), which means high monthly payments.
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“The common dilemma is, ‘Do I take the cashback offer or the subsidized financing,'” explained Dale Pollak, founder of vAuto, a dealership inventory management company. Generally, these incentives cannot be combined, and the better of the two offers may not be so obvious.
“The reality is, it depends on your credit score,” Pollak said. Those with excellent credit and access to several attractive loan offers are likely best served by taking cash back, which will also reduce the total amount financed. Those with less stellar credit may be better served by taking out special financing, if eligible, as these interest rates can beat those offered by banks and other lenders.
To know for sure which is the best offer, it is better to calculate the two figures. “Calculate what you would pay with the cash back,” Pollak said, “and what you would pay with the special financing.”
Have you ever been tempted by a lease that’s too good to be true? Automakers often subsidize leases through their captive finance companies to create attractive, low monthly payments. This is a method of putting cars “for sale” without changing their manufacturer’s suggested retail price. To subsidize these interest rates, manufacturers will sometimes take a greater risk on the residual value of the vehicle (its value at the end of the lease term) but this has no effect on you as the lessee.
Buyers can get leases with very low monthly payments and little or no down payment. But also, be aware of offers that require hefty charges for excess mileage, vehicle disposal (sometimes called lump sum payments), and other hidden fees.
Dealer Cash and Rewards
To drive sales, automakers pay dealers based on sales targets, usually per vehicle or on a stepped scale. Excellent customer satisfaction and new customer acquisition can also bring rewards to dealerships.
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Dealers are more likely to negotiate the purchase price of a vehicle if they know they will still be paid by the manufacturer. Usually, these incentives play a bigger role towards the end of the month, quarter, or model year, as dealers look to hit their sales targets.
But due to the unadvertised nature of these incentives, dealers don’t have to pass these spiffs on to buyers, or disclose them. The main way to exploit them is to have two or more dealerships of the same brand compete for your business on very similar cars. Typically, vehicles that sell slowly are more likely to be backed by dealer money.
Automakers aren’t the only ones offering incentives to buy cars; federal, state, and local governments do it too, often in the form of tax credits. The most high-profile is the federal plug-in electric vehicle incentive, refundable up to a $7,500 tax credit, claimed during tax season.
These tax credits help make new electric vehicles more affordable, especially when leasing, as these savings can be factored into the payment structure of renting an electric vehicle. However, remember that a tax credit is not cash back; you still have to pay or finance the entire purchase price. Additionally, not all purchasers will be eligible for the maximum credit based on their total taxes owed.
How to get the best deal
Check out the incentive offers before heading to the dealership. Kelley Blue Book’s New Car Incentives Page provides up-to-date incentive information categorized by vehicle category and brand.
If multiple vehicles offer multiple incentives, calculate which combination of incentives saves the most money in the long run. The flashiest “deal” may not be the best, and you’ll be misled if you focus on monthly payments versus total cost of finance or don’t know how much the vehicle will be worth over time. .
“Residual value is the largest part of what you’ll ‘pay’ for a car in the first two to five years,” said Karl Brauer, senior knowledge manager at Kelley Blue Book. “For this reason, an incentive that makes the transaction price of one car lower than another does not necessarily mean that it is the cheapest car in the long run, even if it were the cheapest car. expensive to buy that day.”
The time of year can dictate the number or number of incentives offered. Typically, Memorial Day, Labor Day, and the end of the year receive the biggest incentives. Towards the end of a month, dealers may also be more willing to negotiate to meet incentivized monthly sales targets.
Just because you received cash back doesn’t mean you shouldn’t negotiate a lower purchase price. Remember that car dealerships want to sell these vehicles and they are rewarded for it. Manage each step of the car buying process individually. This should always include price negotiation in addition to any incentives.
Don’t let incentives dictate your purchase
Buying a car is not just about getting a so-called “bargain” because of deep discounts. “Keep in mind what your ‘needs’ versus your ‘wants’ are,” suggests Brauer. “Incentives can muddy the waters because you feel like you’re lowering the price, so now you can add more options and trim levels that you wouldn’t normally buy.”
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“Determine which car you really need, can afford, and whether it’s a responsible purchase for you,” Brauer advised. “Once you understand this, study the incentives available.”