This is part of our Car Buyer’s Glossary series which details all the terms you need to know whether you’re buying a new or used car from a dealership.
Car dealerships are not there to give away money. They’re in the game to make money – and can you blame them? The same goes for everyone else who sells a consumer good. So when you hear about an incentive (i.e. discount, low interest rate, or cash back offer), you need to know what’s going on before to assume you get a free meal.
There are a few main types of incentives:
A cash-back or rebate offer
A low or no interest rate offer
An incentive from the factory to the dealer
At a very basic level, an incentive does one of two things for a car dealership: it draws people into the dealership and it helps get inventory out. Let’s take a closer look at these two.
The first part is basically marketing psychology. If you tell someone they can salvage $1,000 on a new car deal, that might get them excited (and invested) in the process. You might be a little less concerned about trading the price down since you’re getting some money back. And the dealership has other ways to make up for that $1,000 — by raising the interest rate a bit or by selling you some very profitable additional services, like an extended warranty. It’s a bit of a sleight of hand game – you’re focused on one thing, but the dealer has multiple ways to win money. The idea is that you’ll get a little distracted and think you’re getting a better deal than you actually are, and they can make a profit elsewhere. And it is totally their prerogative.
The second is a little more useful for consumers. Let’s say there is a car that is selling slowly in the lot. The dealer borrowed money from a lender to buy this car, hoping to resell it for a profit quickly in order to pay minimal interest on the loan. Usually, dealers order the vehicles they want, using information about what is selling well in the area and in their terrain. Sometimes the manufacturer will retain or allocate models based on dealer performance or other considerations, but it’s mostly up to the dealer to decide what combination of vehicles are in the field. Sometimes they get it wrong, or the car isn’t as hot as everyone hoped, and a car stays in the field longer than normal.
But those cars that don’t sell clog the lot. They cost the dealer money, but more importantly, they take up space. Room that could be occupied by even more cars coming from the factory. Since the factory wants to sell all the cars it makes, it doesn’t want the pipeline from factory to dealer to owner to be clogged with old inventory.
So another type of incentive is the one that the manufacturer pays to the dealer. It’s basically a little financial relief and some incentive to lower the price a bit and pull that old car out of the lot to make room for a new one. This is called a “factory to dealer” incentive. You, the car buyer, won’t see it. And maybe the dealership will drop the price a little bit, but maybe they’ll charge full price and pocket that 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 it’s not money coming out of the dealership’s bottom line.
The same goes for other types of manufacturer incentives, which are usually advertised. You can use them to reduce the purchase price of the vehicle, which you have to negotiate. They also don’t hurt the dealer’s bottom line.
So, with factory-to-dealer or manufacturer-advertised incentives, negotiate a low, fair price, then subtract any discounts that apply. If the dealer agrees with the price you negotiated, they can’t complain too much if you want to split the premium provided by the manufacturer.
Finally, let’s talk about low or zero percentage APR offers. There are two pitfalls here, the first being that you must have excellent credit to qualify. The dealer hopes you’ll be so committed to the deal that by the time the finance guy tells you you don’t qualify, you won’t want to walk away. You will be psychologically invested.
The second is that you’ll almost certainly be forced to use the manufacturer’s captive lender – like Honda Financial Services or Ford Credit, to give you two random examples. This may or may not be a problem for you.
In reality, the dealer is trying to do two things with a low-interest loan: empty inventory or make money on other parts of the transaction, such as the purchase price or highly profitable extras. added to the transaction. The latter can be an extended warranty or an undercoat service – which we don’t recommend.
So this is it. Incentives are generally a good thing for savvy 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.