Incentives: Unraveling the Offers

Automakers have issued pricing incentives for decades, but today's car shoppers are faced with an expanding array of promotions: Loyalty rewards, college bonuses and free extras join invoice pricing and zero-percent financing. It's no wonder a Consumer Reports study found car shoppers were confused.

"People loathe the car-buying process," said Fritz Elmendorf, Consumer Bankers Association spokesman. "Now it's maybe worse than ever because you know you have to negotiate, and it's hard. In the past, [carmakers] were much more able to hide the real price of the car.

"But the internet came along, and now people have a lot more information," Elmendorf said. "The pricing has gotten more transparent. Consumers can see more about what is going on if they spend a little time educating themselves."

Below, we've broken down the types of incentives available.

Cash Rebates

A cash rebate can be used for a variety of things, including upgrading to a higher trim level of a Ford Escape or other vehicle.

Automakers offer cash rebates directly to the buyer. The rebates can range from a few hundred dollars to several thousand dollars. Cash rebates are easy to understand and widely available, and they often have the fewest strings attached.

"They have to offer something to people that don't qualify for the zero-percent [financing] or whatever the rate is," Elmendorf said.

The rebate can go toward a variety of things: lowering the car's total price and the buyer's monthly payments, upgrading to a higher trim level or even paying the remaining money owed on the buyer's trade-in.

J.D. Power and Associates analyst Tom Libby said buyers should be willing to negotiate the car's price even after the rebate is applied. Rebates are usually paid for by the automaker, so the discount shouldn't affect how much the dealership makes on the deal.

"In general, it benefits the consumer to hold onto the [rebate] coupon," Libby said, suggesting that buyers not disclose right away that they're aware of the rebate. "If you tell the salesperson from the beginning that you have a coupon for $100, he might raise the price of the car $100, so at the end he's where he wants to be."

See current cash rebates here.

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Reduced Pricing Programs

Remember employee pricing? Though most people think of employee pricing or similar programs as incentives, they're actually different.

"Employee pricing was not an incentive," J.D. Power and Associates' Libby said. "It was a pricing program. They actually changed the price of their models.

"Incentives vary by model because of the supply [and] demand," Libby said. "One of the great benefits of [manufacturer] incentives is they can be adjusted many ways, whereas prices are much more rigid."

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Discount Financing and Bonus Cash

Sometimes an incentive requires the buyer to purchase through the company's captive finance arm; for this Toyota Avalon, a buyer would have to finance through Toyota Financial Services.

Nearly two buyers finance their car for every one that pays cash, according to J.D. Power. Financing involves making a down payment and paying the balance of the loan in monthly installments, usually from three to seven years. Lenders range from automakers' captive affiliates — like Toyota Financial Services or Ford Credit — to banks and credit unions. Buyers can also finance a car through home equity loans or even borrow from a friend or relative with deep pockets.

"The monthly payment, more than anything else, will define the affordability of the vehicle," Elmendorf said. "The consumer has some play in figuring out the term or the length of the loan. Now six years is the typical term of the car loan, whereas years ago it was more like three. It's steadily gotten longer as consumers try to keep the monthly payment lower."

One way to lower the payment is to get a better interest rate. To persuade buyers to finance with captive lenders, automakers often issue discount financing. Rock-bottom rates — including zero percent — used to be offered only with 24- or 36-month loans, and buyers needed top credit ratings to qualify.

Rebates require customers to finance using the prevailing interest rates, so they usually can't combine them with an offer for discounted rates. It's a tough decision: Finance a car with $3,000 off and a 6 percent loan, or pay full price with a 3 percent loan?

"The math is really pretty challenging," Elmendorf said. "To the manufacturer, it's a similar expense whether the consumer takes a zero-percent loan or a cash rebate. They just want to move the car, so they're trying to even out the deal."

Some automakers try to sweeten the financing offer by combining it with an additional cash rebate — often called "bonus cash." Bonus cash, however, is usually much less than the cash rebate offered without the discount financing.

Need to figure out which offer gives you the lowest monthly payment — a cash rebate, discount financing or discount financing and bonus cash? Try this calculator or browse current financing offers here.

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Specialty Discounts: Loyalty, College and More

Loyalty deals reward owners who trade in the same brand of car for a new car.

Beyond cash back, some automakers offer discounts to specific buyers. The offers might include a loyalty bonus for buyers who trade in cars from the same automaker, a competitive bonus for those who trade in rival models or discounts for recent college graduates or members of the military.

Consumer Reports' auto pricing director Rob Gentile calls these programs "specialized customer rebates," noting that buyers need not always qualify to get the discount.

"They're given to certain types of people," he said. "At the end of the day, you essentially may be able to negotiate the equivalent of that college grad rebate, even if you're not a college grad, because you know the dealer is anxious to sell those models."

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Non-Cash Offers: Gas, Leather and More

While rebate and financing deals are the most common incentives, not everyone limits themselves to those deals. Non-cash incentives stand out more, given their uncommon nature. They range from upgrades like free navigation systems or leather interiors to oddball offers including iPods, gas cards and even electric guitars.

"Ultimately, it equates to a certain dollar amount they're giving you — they're just being more creative as to how to give that," Gentile said. "It's a different way to dress the incentive, if you will."

Some offers can be redeemed for cash, but remember to mentally award the freebie your own market value. A navigation system or leather interior could be worth up to $2,000 — but only if you wanted it in the first place. If you already own an iPod, the value of an extra one should drop considerably. And if you make that apparent to the salesperson, there's a good chance he won't play the bonus item's full value into the negotiation process.

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Dealer Cash

Automakers also give dealerships extra money to sell certain models without advertising those deals to consumers, which is known as dealer cash. On some cars, cash is extended to dealers according to how well the car is selling, in much the same way that customer rebates are offered.

"It could be several hundred dollars or several thousand dollars, depending on the model," Gentile said. "The dealer uses it as a way to sell vehicles, so they can elect to give you some of it or all of it."

Often, dealer cash is granted based on the number of vehicles a dealer can sell.

"If you sell 10, you get $100 per unit — if you sell 15, you get $150," Libby said. "It's sort of a subset of dealer-cash programs. They're very powerful because they motivate you to make that [quota]."

Dealer cash isn't publicized, but you can check out current deals here.

Another form of cash is called holdback, which is a portion of a car's sales price (typically 2 percent to 3 percent of either the invoice price or MSRP) that an automaker returns to a dealer, usually on a quarterly basis.

It's a way of boosting the dealer's cash flow and helps the dealer keep his lights on. Most dealers see holdback as something that they're entitled to. In a general sense, everything is negotiable, but this is one item on which dealers seldom budge. And we mean seldom. If a dealer claims he wouldn't make any money on the deal you propose, you may be able to use your knowledge of dealer holdback to call his bluff.

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Leasing Offers

Leasing a car involves taking ownership for a set period, often two or three years. The costs include an initial fee as well as monthly payments, but usually the payments are much lower than they would be to purchase the car. At the end of the term, lessees can buy the car for its remaining value.

Lease rates are determined mainly by the car's original price, the lease's length and the car's expected residual value when the lease is over.

Higher residual values translate to lower monthly payments. The exact residual value is unknown, as it would require automakers to know how much the car will be worth two or three years down the road. Still, they can estimate the car's value. In some cases, Libby said, automakers enhance the estimates so they can lower the monthly costs to lessees.

"That's how Mercedes and Lexus are able to promote low payments," he said.

As with a regular purchase, shoppers looking to lease should be willing to negotiate on prices, Gentile said.

"You can negotiate the purchase price of the lease," he said. "The reality is that the $299 a month may be based on the full MSRP. The key is to settle on the purchase price as if you were buying."

Learn more about leasing here.

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Posted on 10/2/08

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