Advice

Car Dealer Incentives Defined

By 04/27/2023 4:00pm
Rebates advertised on car windshield

Quick Facts About New Car Incentives

  • Dealers and manufacturers use various types of incentives like cash rebates, low financing rates, or equipment upgrades to attract buyers and boost sales.
  • Research incentives before visiting a dealership and compare the offers because the flashiest “deal” might not be the best one for you.
  • Choosing the right car for your needs outweighs getting a so-called ‘good deal’ due to big discounts.

You’ve probably seen the ads before: “$3,000 bonus cash on this model” or “0% financing on that model.” Perhaps these ads prompted you to go to your local dealership to check them out. If so, you’re not alone. These attractive discounts are known in the auto industry as “incentives.” It’s a way to drive down the cost to buy or lease a new vehicle to entice you to act.

Automakers typically place incentives on older models or slow-sellers. Included on the list are cash-back offers, special interest rates, discounts, and lease deals. The benefit is that these incentives can mean big savings. Beyond these conventional offers, there are also other non-cash inducements that can work in your favor. Here’s our guide on what to look for and how to negotiate the best deal.

Types of New-Car Incentives

How To Get the Best Deal

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 offered regionally or nationally. These include offers to repeat buyers of a brand (“loyalty cash”), or buyers who have left a competing brand (“conquest cash”). Rebates also may extend to first-time car buyers, military members, first responders, and recent graduates.

Low-Interest Financing

Generally, the better your credit, the lower your auto loan interest rate will be. For those with excellent credit, automakers offer low or even 0% 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” automaker-controlled financing company. While many of these offers are for 60-month loans, some of the lowest rates may require very short terms (12 or 24 months), meaning high monthlies.

“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. (Kelley Blue Book and vAuto are part of the Cox Automotive family.) 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 elsewhere 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.”

Lease Deals

Ever consider a lease that sounded too good to be true? Automakers often subsidize leases through their captive financing companies in order to create attractive low monthly payments. This is a method to put cars “on sale” without altering their manufacturer’s suggested retail price (MSRP). To subsidize these interest rates, 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, vehicle disposition (sometimes known as balloon payments), and other hidden charges.

RELATED: Kelley Blue Book Complete Guide to Leasing

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.

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.

Government Incentives

Automakers aren’t the only ones to offer incentives. Federal, state, and local governments do too, often in the form of tax credits. The most publicized is the federal incentive for some electric vehicles and plug-in hybrids redeemable for up to a $7,500 tax credit, claimed during tax season.

These tax credits help make new electric vehicles and plug-in hybrids more affordable, especially when leasing since these savings can be factored into the 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.

MORE: Electric Car Rebates and Incentives: What To Know by State

Non-Cash Incentives

Don’t get us wrong, cash can be a tremendous incentive in the new car buying process. There are plenty of offers of cash rebates, low or no interest financing and lease deals from both manufacturers and dealers alike to either get you into the showroom or behind the wheel. But these advertised offers are just the tip of the iceberg. Savvy shoppers find more incentives that don’t necessarily fall into traditional money-based offers. Here are a few that we’ve found:

Vehicle Equipment Upgrades

Who wouldn’t like a free option or feature? While some dealers may offer to throw in paint or interior upholstery protection (and even undercoating) at no cost, look for other, more substantial upgrades such as a better sound system, an extension of the free introductory period on the vehicle’s satellite radio or other accessories that may be installed at the dealership, like a bike rack, luggage carrier, or all-weather floor mats.

RELATED: Car Safety Features 101: Everything You Need to Know

Finance Savings

Always look to improve the terms of your loan or lease. Among these would be eliminating the down payment or having the dealer cover the first installment. If you are a repeat customer, see if there are any loyalty rebates. If you are leasing, bargain for additional yearly mileage or eliminate any lease disposition fees from the contract.

Aftermarket Warranty Coverage

See if there is additional warranty coverage available above the factory warranty. Look for the dealer to provide either an extended powertrain or general warranty. You may want to ask for free gap insurance that covers the cost of replacing your car if it’s totaled in an accident.

Service Perks

You can bargain for maintenance extras. These can include free regularly scheduled maintenance, oil changes, car washes, loaner vehicles, and shuttle service from the dealership.

How To Get the Best Deal

Research Incentives

Look-up incentive offers before you go to the dealership. Visit the manufacturers’ websites and don’t forget to enter your zip code, since most offers are based on locale. Also, check out Kelley Blue Book’s Ten Best Car Deals of the Month when starting your search.

Compare Special Offers

If multiple vehicles offer multiple incentives, calculate which combination of incentives saves the most money long-term. The showiest “deal” may not be best. Don’t focus solely on the monthly payments over the total cost to finance. The same holds true if you ignore how much the vehicle will be worth over time.

Vehicle depreciation is the biggest factor in what you will ‘pay’ for a car over the first two to five years. Be aware that an incentive that makes one car’s transaction price lower than another that holds its value better may not save money in the long run.

MORE: Kelley Blue Book Best Resale Value Awards

Shop Strategically

The time of year dictates how the number of incentives available. Typically, Memorial Day, Labor Day, and the year’s end see the largest incentives. Towards the end of a month, dealers may also be more open to negotiation, in order to meet monthly sales goals.

Browse dealer reviews, or share about your experience at a dealership here.

Negotiate Deals

Just because you get a cash rebate doesn’t mean you shouldn’t negotiate a lower purchase price. Remember, car dealers want these vehicles sold, and they cash in 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. Incentives can deceive because you feel like you’ve cut the price down, so now you can add more options you wouldn’t normally have bought.

Figure out what car you really need, can afford, and if it’s a responsible purchase for you. Once you’ve got that down, then investigate what incentives are out there.

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Editor’s Note: This article has been updated since it was originally published.