Car Incentives Explained

new-car-incentivesSelling new cars is a very competitive business.

There are thousands of new-car dealers and there are a couple of dozen car companies who make thousands of makes/models/styles of cars. These companies are constantly competing for the business of car-buying customers.

One way they compete is by offering attractively designed vehicles that have the features, comfort, safety, performance, fuel-economy — and prices — that customers want. In many cases, price is the most important factor.

Although all new cars have a MSRP (Manufacturer’s Suggested Retail Price) on the legally-mandated window sticker, very few new cars actually sell for the window-sticker price. Most customers pay less.

How much less? See Edmunds for detailed pricing, including incentives, for all car makes and models. Get dealer price quotes so that  you how much less than sticker price you should expect to pay. In many cases, the price is less than a dealer’s factory invoice price.

How can a dealer stay in business by selling cars for less than sticker price?

First, the dealer typically has a potential profit margin of about 6%-8%. This is the difference between sticker price and invoice price, the price he pays when he buys the car from the manufacturer. Although a dealer must make some profit and pay for his own cost of doing business, he has some flexibility to reduce his profit margin and give customers a price discount. Often, the amount of the discount depends on the customer’s negotiating skills and price knowledge.

A second factor in the price a customer pays for a new car is called “incentives.” Car makers, in their attempt to increase sales and beat competition, offer limited-time incentives in the form of direct factory-to-customer rebates, 0% APR loans, low-interest loans, special lease deals, and “hidden” factory-to-dealer cash.

Rebates go directly to the customer and reduce the price of the vehicle. Rebates apply on top of any customer-negotiated price discounts from the dealer. Many dealers will try to convince customers that they can’t get a dealer discount and a factory rebate at the same time. Not true. Rebates usually cannot be combined with low-interest loan offers, although some can.

0% APR loans are nearly always good deals. It simply means you pay no interest or finance charges for the life of the loan. Low-interest loans can be good deals too, especially if the rate is considerably lower than the current national average new-car rate (see for current rates). However, since you typically can’t combine these loan deals with rebates, it becomes a question of whether the rebate or the special loan rate is a better deal.

Generally, if the rebate is more than about $1500, taking it will be better than accepting a 0% or low-interest loan. But you can always do the math comparison yourself with an online auto loan calculator. You should consider taking the rebate if you are short of down payment money since the rebate can be used for that purpose.

Another form of limited-time incentive is not one that customers actually see directly. It’s called factory-to-dealer cash. Customers don’t know if, when, or how much — unless you read this web site. It’s money paid to dealers by the manufacturer to help sell certain vehicles, such as last-year’s models. Dealers can use the money as they like, such as for advertising or sales events, but it is usually applied mostly as a price discount to customers. So, the factory gives money to his dealer, who give the money to customers.

Most luxury car makers (Acura, Mercedes, BMW, Infiniti, Lexus, Audi) use factory-to-dealer cash as a way of letting dealers offer price discounts without offering obvious rebates. They can also “hide” price discounts and low interest rates in special lease deals. You see, they don’t want to be too obvious or viewed as “discount” brands, so the discounts are “hidden.”

This is how dealers often sells cars for less than invoice price. Some discount comes directly from the dealer’s pockets, but more comes from the car company’s pockets. The dealer can still make a reasonable profit, at the car company’s expense. Of course, the customer is the real winner.

To find actual dealer prices that include incentives and to learn what incentives are available, we recommend as the best source of such information.

The final type of new-car incentive is the special lease deal. Car companies such as Honda frequently offer certain vehicle models and styles at an attractive special lease rate. These are nearly always genuinely good deals. To get the low monthly payment being offered, the company must lower the vehicle price, set a lower-than-average interest rate (lease money factor), and set a higher-than-standard lease-end residual value. The combination of all those factors makes for a low monthly payment, although a down payment is usually required to make it possible.


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