This is part of our Car Buyer Glossary series that breaks all the prerequisites for knowing whether you are buying a new or used car from a dealership.
Car dealers are not in the business of paying. They’re in the game to make money – and can you blame them? So everyone else is selling well to a consumer. So when you hear about an incentive (i.e., a discount, low interest rate, or cash back offer), you should know what is happening before you assume you are getting a free lunch.
There are several major types of incentives:
A cash-back or rebate offer
Offer a low- or zero-percent interest
Dealer stimulus from a factory
At a very basic level, a stimulus does one of two things for a car dealer: it takes people to the dealership and it helps to pull out inventory. Let’s look at both of these a little more closely.
The first part is basically the psychology of marketing. If you tell someone that they can get a 1,000 return on a new car deal, it can be exciting (and invested) in their process. You may be a little less anxious about reducing the price as you get your money back. And the dealer has other ways to make that $ 1,000 – slightly paddle interest rates or sell you some high-profit extra services, such as an extended warranty. It’s a bit of a shell game – you’re focused on one thing, but the dealer has different ways to make money. The idea is that you will be a bit confused and or think that you are really getting a better deal than you and they can gain something else. And it’s entirely their prerogative.
The second is a little more helpful for consumers. Suppose a slow-selling car is sitting on the lot. The dealer borrowed money from a lender to buy the car, hoping to sell it for a quick profit so that they could pay the minimum interest on the loan. Typically, dealers order the vehicle they want, using information about the area and what sells best in their lot. Sometimes the manufacturer sticks or assigns models based on the dealer’s performance or other considerations, but it is largely up to the dealer to decide what mixture the lot car has. Sometimes they do it wrong, or the car doesn’t heat up as much as everyone hopes and sits in a car lot longer than usual.
But a lot of those cars won’t sell stuck up. They cost the dealer money, but more importantly, they take place. That room can be occupied by more cars coming from the factory. Since the factory wants to sell all the cars they make, they don’t want the pipeline from the factory to the dealer and then the owner gets stuck with the old inventory.
So another type of incentive is one that is given to the dealer by the manufacturer. It’s basically a small financial relief, and some of the incentives go a long way in reducing the cost and making room for the old car to make room for a new one. This is called a “factory to dealer” incentive. You, the buyer of the car, will not see it. And maybe the dealer will lower the price a bit, but maybe they will ask for the full price and pocket the money from the factory.
Factory-to-dealer incentives are hard to find, but there are a few sites that list them. You can use them to lower the price of a slow-selling car a bit, because that doesn’t mean it comes from the dealer’s bottom line.
This also applies to other types of manufacturer incentives, which are usually advertised. You can use these to reduce the purchase price of a car – something you should consider. They do not hit the bottom line of the dealer.
So, with the incentive of the dealer or the advertised manufacturer from the factory, discuss a low, fair price and then subtract any applicable discount. If the dealer is right with the price you have negotiated, they will not be able to complain too much if you want to share in the bounty paid by the manufacturer.
Finally, let’s talk about low- or zero-percent APR offers. There are two catches here, the first is that you have to have great credit to qualify for them. The dealer expects that you will be so committed to this deal that when the financier tells you that you are not eligible for it, you will not feel like leaving. You will invest psychologically.
The second is that you will almost certainly be locked out using the manufacturer’s captive lenders – such as Honda Financial Services or Ford Credit – to give you two random examples. This may or may not be a problem for you.
Really, dealers are trying to do two things with low interest rate loans: clear inventory, or make extra money on other parts of the contract, such as the purchase price or the high-profit in the contract. The latter could be an extended warranty or an undercoating service – neither of which we recommend.
So you go there. Incentives are generally a good thing for intelligent car buyers, and now that you know the basics of the three main types of incentives, you’ll be better equipped to use them to your advantage.