Using new car incentives to your advantage is a smart way to get a good deal. Most often offered through the manufacturer, an incentive can lower the overall cost of a car through a reduction in the terms of the lease or the finance interest rate. Although incentives are subject to eligibility requirements, if you have a decent credit score, it's possible to get a better deal.

The two most common types of manufacturer incentives are:

  • Customer incentives.
  • Dealership incentives.

Customer Vehicle Incentives

Customer incentives provide savings from the manufacturer directly to the consumer. These incentives often require potential buyers to purchase a vehicle before a specified date. Qualification is based on your credit score.

Common customer incentives include:

  • Lease incentives.
    • These are based on residual value—the amount a car depreciates by the end of a lease, which is used to calculate monthly payments.
    • Research which manufacturers offer lease incentives for cars with a high residual value.
    • A higher residual value means the car will have less depreciation while under the leased contract, which will yield a lower monthly payment.
      • EXAMPLE:
      • You find a $20,000 car that will only be worth $5,000 at the end of a 3-year lease. Your monthly lease payment would be the difference in cost—$15,000—divided by the lease term—36 months— for a monthly payment of $416.
      • You find another $20,000 car that will be worth $12,000 at the end of a 3-year lease. Your monthly payments would be $8,000 divided by 36 months—$222.
      • Car #2 offers a higher residual value (less depreciation) and will result in a lower monthly payment.
  • Cap cost reduction.
    • A manufacturer may offer cash back or other rebate incentives that will help to reduce the amount of money you'll need to finance a vehicle, which is known as a cap cost reduction.
      • Works the same way as a down payment on a loan.
      • Not a security deposit, but rather a form of pre-payment used to lower monthly payments.
  • Finance incentives.
    • Usually consist of low interest-rate financing.
      • Interest rates may not be the entire length of the contract, so make sure you know the details beforehand.
      • The lowest interest rates are often reserved for shorter loan terms.
    • In general, a low Annual Percentage Rate (APR) is between 0% and 5%.
  • Loyalty programs.
    • These provide deals for specific customer types, such as:
      • First-time buyers.
      • Recent college graduates.
      • Military members.
      • Repeat customers.

Dealer Vehicle Incentives

Unlike customer incentives, manufacturers provide incentives to dealers as motivation to sell more cars. Most dealer incentives are offered by region, which means that purchase prices can vary from one dealership to another on the same vehicle.

Though the dealer is under no obligation to offer these savings to potential buyers, you can usually negotiate a lower sale price by doing a little research beforehand. Dealerships are usually given incentives based on:

  • Inventory stock.
    • Dealers pay for inventory.
    • Negotiating a lower price is easier the longer the vehicle has been on the lot.
  • Sales goals.
    • Incentives from automakers sometimes begin once a sales goal is reached.
    • Each additional sale after a sales goal often results in a higher incentive for the dealer.
      • Easier to negotiate a lower purchase price.
  • End-of-year models.
    • New inventory decreases the value of last year's models.
  • The number of new customers.

Tips to Get the Best Incentives

While customer incentives are normally heavily advertised on TV and online, some incentives such as those offered through a dealership can be hard to find. Not only do they vary by region, but incentives also constantly change.

To get the best deals, it's important to do as much research beforehand as possible. The more you know, the better the deal you're likely to get.

So before you head to the dealership, use these tips to get the best deal possible:

  • Negotiate the price of the car before you mention any incentives.
    • This will help to drive the total cost as low as possible.
  • Research incentives in your area for multiple manufacturers.
    • If a competitor has a better deal advertised, it can help you drive down the price.
  • Search websites such as Kelley Blue Book that provide a list of the best incentives for the current month.
  • Look for models that are at the end of their production cycle.
    • Last year's models lose value once new models arrive.
    • Dealers will offer good deals to move them as quickly as possible.
  • If your finances allow it, work a cash deal.
    • Dealers will often lower the sale price with more cash upfront.
  • Try to make your purchase at the end of the calendar month.
    • If dealers have too much inventory, they are likely to try to move their stock quickly, and may have incentives to do so.
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