The 7 Types of Car Incentives
Back then, Chrysler was offering $200 or $300 cash back to each customer - a far cry from the thousands of dollars that are regularly offered these days.
Car incentives are definitely here to stay - but they do range widely from vehicle to vehicle. The domestic manufacturers (GM, Ford, Chrysler) tend to offer the most incentives while the foreign car makers are usually more refrained.
Luxury brands tend to stay away from cash back rebates, but instead offer deals in other ways - usually through lease incentives and hidden dealer rebates. Let's take a look at all the different options currently available:
Customer incentives generally fall into 4 different categories:
- Cash Back Rebates
- Finance Incentives
- Lease Deals
- Loyalty Programs
- Bonus Cash
Let's take a look at each one.
Cash Back RebatesThis is the most common and well-known type of car incentive. This is when car manufacturers offer cash rebates directly to the consumer when they purchase before a specified date. When a car has a cash back incentive, it usually means it's not selling as well as they would like. The incentives will typically be rolled over month after month and even increase as the year unfolds.
Cash back rebates usually range between $500 and $5,000 and are redeemed through lowering the purchase price of the vehicle rather than getting an actual check. It's worth noting that most states tax you on the full price of the vehicle before a rebate is applied. Here's a list of states that don't tax the rebate.
Finance IncentivesLow car financing rates have become a very popular incentive as of late. Before 2001, it was very rare to have a car manufacturer offer 0% financing - nowadays, they're all over the place. This is due in part to historically low interest rates. Financing incentives are oftentimes offered alongside cash back rebates, however, you will usually need to decide between the two as most car makers do not allow you to take both at the same time. Typical financing rates range from 0% to 4.9% financing for up to 72 months for qualified buyers. This means you will need to have good credit to qualify for the best rates (check your credit score here).
Lease DealsRoughly 25% of drivers lease their vehicles instead of buying - so it makes sense that manufacturers offer special lease deals to entice them. What they usually do is take a cash back rebate or financing incentive and apply it towards the lease instead. The money is used to either increase the residual value of the car or lower the capitalized cost - both of which make the lease cheaper for the buyer. They can also apply a financing incentive and lower the money factor, which is essentially the interest rate (see Lease Terms Explained).
Loyalty ProgramsAlthough not as common, loyalty and other types of "bonus" incentives can add several hundred dollars in additional savings. Loyalty incentives are given to car buyers who already own, or have owned, the same brand of vehicle in the past. Manufacturers want to reward those who continue buying from them - in the form of a rebate usually amounting to $500 or more. Along these same lines, there are incentives called Conquest Cash which reward buyers who own a different brand of vehicle. In this case, the manufacturer rewards the consumer for defecting from a competing brand.
Bonus CashThese incentives usually target a subset of the population including recent college grads and military personnel. Not all manufacturers offer these types of bonus incentives and they're not advertised heavily, so you'll most likely need to call a dealership to see which ones are being offered in your area.
Manufacturer to Dealer Incentives
Many car buyers are unaware that dealers can also receive incentives each time you buy a vehicle. These types of incentives have been around for a long time - customer incentives are a relatively recent phenomenon.
The amount of money dealers receive from incentives may surprise many of you. It's not unheard of for dealers to get cash back incentives of over $10,000 for some slower-selling luxury models, and thousands for some popular leftover models. It's no wonder why dealers can advertise prices below invoice and still make a ton of money.
Let's take a look at the two ways dealers get incentives.
Dealer CashThis is similar to customer cash back rebates, but instead of going to the car buyer, the incentive goes into the pocket of the dealer. Dealer cash is used more often by foreign manufacturers and luxury brands because they don't want to "cheapen" their vehicles by offering discounts to the customer. Dealer cash is one way to discount slower selling cars without the perception that its on sale.
If you follow my car buying method, you can usually get the dealers to pass the incentive they receive over to you via a lower transaction price. Dealer cash amounts are typically between $500 and $4,000, but I've seen them go as high as $60,000 on ultra-luxury models such as the Mercedes Maybach.
Dealer RewardsThis is where the incentives landscape gets fuzzy. Each manufacturer has their own special rewards program that gives dealers kickbacks when they meet certain sales goals or other targets. Sometimes incentives are given for high customer satisfaction marks or other dealer improvements. For example, GM, Mercedes and Mazda offer a per-vehicle bonus for facilities improvements while Toyota offers better inventory allocation for dealers who maintain their dealerships at a high standard. These incentives are hidden and sometimes the only ones that know about it are the individual dealers. These incentives can be as high as $1,000 for each vehicle sold, but will usually average $100 to $200.
The best way to see which incentives are currently being offered in your area is to check with a local dealer. Incentives vary by region and not all of them are advertised. I've found that incentives data published online can be way off - even on the manufacturer's own web sites.
Each week, I'll keep you up-to-date on the latest car deals and news that might affect your purchase. This includes...
- Best Rebates, Incentives, and Lease Deals
- Latest Car Buying Scams and Tricks
- The Best & Worst Time to Buy a Car
- Which Cars You Should Avoid
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