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You’ve probably seen the ads before—“$3,000 bonus cash on this model,” “0% financing on that model”—perhaps these ads even enticed you to drive over to your local dealer to check them out. If so, you’re not alone. These attractive discounts are known in the industry as “incentives,” ways of driving down 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 on the list of incentive types are cash-back offers, special interest rates, and lease deals. The benefit to you is that these incentives can lead to big savings. However there are a few important details to consider.
Types of new-car incentives
Customer cash rebate
The simplest form of incentive is the cash rebate, a dollar amount that is applied to the price of a vehicle—lowering its purchase, finance, or leasing costs. These rebates, sometimes referred to as “cash back” or “bonus cash”, are typically offered regionally or nationally, but also in special circumstances; for instance, to repeat buyers of a brand (“loyalty cash”), buyers who have left a competing brand (“conquest cash”), as well as first-time car buyers, military members, and recent graduates.
Generally, the better your credit, the lower your auto loan interest rate will be. For those with excellent credit, automakers offer low or even zero-percent interest loans on specific vehicles, typically only those in dealer stock. How can they afford to do that? It’s simple, really. The loans are offered (and subsidized) through a “captive,” an automaker-controlled financing company. While many of these offers are for 60-month loans, some of the lowest rates may require very short payment terms (12 or 24 months,) meaning high monthly payments.
Read: How to save $2,000 or more on your next car
“The common dilemma is, ‘do I take the cash back offer, or the subsidized financing,’” explained Dale Pollak, founder of vAuto, a dealer inventory management firm. Typically these incentives can’t be combined, and the better of the two deals may not be so obvious.
“The reality is that it’s dependent on your credit score,” said Pollak. Those with excellent credit who have access to multiple great lending offers are likely best served by taking the cash rebate, which will also lower the total amount financed. Those with less stellar credit may be better served by taking the special financing, if they qualify, because those interest rates may beat the ones offered by banks and other lenders.
To know for sure which is the better deal, it’s best to crunch both numbers. “Calculate what you’d pay with the cash back,” said Pollak, “and what you’d pay with the special financing.”
Ever been tempted by a lease that sounded too good to be true? Automakers often subsidize leases through their captive financing companies to create attractive low monthly payments. This is a method to put cars “on sale” without altering their manufacturer’s suggested retail price. To subsidize these interest rate the manufacturers will sometimes take a bigger risk on the residual value of the vehicle (its value at the conclusion of the lease term) but that has no effect on you as the lessee.
Shoppers can obtain leases with very low monthly payments and with little to no money down. But also, be aware of deals that require large fees for excess mileage, vehicles disposition (sometimes known as balloon payments) and other hidden charges.
Dealer cash and rewards
To spur sales, automakers compensate dealers based on sales goals, typically on a per vehicle basis or an escalating stair-step scale. Excellent customer satisfaction and new customer acquisition can also earn dealer rewards.
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Dealers are more apt to negotiate a vehicle’s purchase price if they know they’ll be compensated from the manufacturer regardless. Usually these incentives play a larger role closer to the end of the month, quarter or model year as dealers look to hit their sales targets.
But because of the unadvertised nature of these incentives, dealers don’t have to pass these spiffs onto buyers, nor do they have to disclose them. The key way to tap into them is to get two or more same-make dealers to compete for your business on very similar cars. Typically, slow-selling vehicles are most likely to be backed by dealer cash.
Automakers aren’t the only ones to offer car buying incentives; federal, state, and local governments do too, often in the form of tax credits. The most publicized is the federal incentive for plug-in electric vehicles, redeemable for up to a $7,500 tax credit, claimed during tax season.
These tax credits help make new electric vehicles more affordable, especially when leasing, since these savings can be factored into an EV’s lease payment structure. However, remember that a tax credit is not a cash rebate; you must still pay or finance the entire purchase price. Also, not all buyers will qualify for the maximum credit depending on their total tax due.
How to get the best deal
Look-up incentive offers before you go to the dealership. Kelley Blue Book’s New Car Incentives page provides up-to-date incentive information arranged by vehicle category and make.
If multiple vehicles offer multiple incentives, calculate which combination of incentives saves the most money long-term. The showiest “deal” may not be best, and you’ll be led astray if you focus on monthly payments over the total cost to finance or ignore how much the vehicle will be worth over time.
“Residual value is the biggest single chunk of what you will ‘pay’ for a car over the first two to five years,” said Karl Brauer, senior director of insights at Kelley Blue Book. “For that reason, an incentive that makes one car’s transaction price lower than another’s doesn’t necessarily mean it’s the less expensive car long-term, even if it was the cheaper car to buy on that day.”
The time of year can dictate how few or many incentives are offered. Typically Memorial Day, Labor Day, and the year’s end are met with the largest incentives. Toward the end of a month, dealers may also be more willing to negotiate, to meet incentivized monthly sales goals.
Just because you received a cash rebate doesn’t mean you shouldn’t negotiate a lower purchase price. Remember, car dealers want these vehicles sold, and they’re rewarded for doing so. Handle each step of the car buying process individually. This should still include price negotiation in addition to any incentives.
Don’t let incentives dictate your purchase
There’s more to a car purchase than getting a so-called ‘good deal’ due to big discounts. “Keep in mind what your ‘needs’ versus ‘wants’ are,” suggests Brauer. “Incentives can muddy the waters because you feel like you cut the price down, so now you can add more options and trim levels you wouldn’t normally have bought.”
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“Figure out what car you really need, can afford, and if it’s a responsible purchase for you,” advised Brauer. “Once you’ve got that down, then investigate what incentives are out there.”
This story originally ran on KBB.com.