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A Primer on Incentives
Friday, 21 November 2008 14:47

There are two basic categories of incentives available: low-interest loans and rebates. If you’ve got poor credit, you probably won’t qualify for low interest loans. However, even if you have good credit, you will generally have to choose between taking the low-interest loan or taking a cash rebate.

Here is a list of the types of incentives you will encounter:

  • Cash Rebates: which essentially buy down the purchase price. Most people simply add them to their downpayment.
  • Low-Interest financing: These deals now range from 0 to 5.9 percent, depending on market rates, compared to the 6.86% banks are now charging consumers with top credit scores for new car loans. The catch: these loans are often for just 36 months and you have to have top-drawer credit to qualify for the offers. In other words, manufacturers are willing to earn less interest from low risk customers who can afford to pay them back quickly. Their reward: greater market share with the most desirable part of the market. If a dealer says your credit score is too low to qualify, ask him what the cut off credit score is for the offer. If the research you did shows your credity score qualifies you, show him your information and ask him to check again.
  • Mix and match: Sometimes a manufacturer will allow you to choose a mix of rebate and low-rate loans. Be sure to calculate total cost and monthly payments to determine which is the best deal for you. Sometimes you may be better off with the straight rebate.

  • Lease deals. These might be good if you don’t have much cash for a down payment or only expect to put 12,000 miles a year on your vehicle. 

  • Dealer incentives: These are financed with cash dealers receive from manufacturers to move certain models. They can vary by region and tend to apply to Japanese and European-made cars and American luxury models. Sometimes you can negotiate with the dealer to get some of that cash, which can be worth thousands of dollars per vehicle.
When and how manufacturers offer incentives is determined by supply and demand. The worse a car is selling, the higher the incentives. Incentives will generally coincide with the new model year. However, new models – like new TV shows - are no longer being introduced only in late summer and fall. Increasingly, they are introduced throughout the year, so it’s helpful to know when your model year begins.

Just because you don’t see an incentive advertised for your model, don’t give up. Manufacturers use both national and regional incentives. Often they will offer an incentive in a specific area of the country to defend or boost their share of sales. Sometimes they are trying to boost sales to a specific type of customer. These are so-called “customer-specific incentives.” Other times they are simply trying to boost their sales of pick-up trucks in Texas. These are known as “model-specific incentives.”

For instance, Ford might offer buyers with a FICO score of 790 and above 3.0% financing plus a $1,000 cash rebate if they finance with their captive finance company, Ford Motor Credit.

Here are some examples of groups targeted by customer specific incentives:
  • Existing customers: They are sometimes offered incentives to remain loyal to a particular brand.
  • First time buyers: Once a Ford customer, always a Ford customer
  • Military personnel: 2 million strong
  • College students. Not making much money now but may be later.
Remember, rebates and financing offers come directly from the manufacturer and don’t affect the dealer’s profits. That means that when you hit the dealer’s lot, you can and should continue negotiating on price regardless of what incentives are being offered.
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