Car dealers don’t give away money. They are in it to make a profit – and you can’t blame them. Everyone else is selling a consumer product. You should know what you are getting when you hear about an incentive, such as a discount, low rate interest rate or cashback offer.
There are three main types of incentives
An incentive is a tool that helps a car dealership get more customers. It also helps to move inventory. Let’s take a closer look at each.
The psychology of marketing is the first part. Telling someone that they can get $1,000 back on a new vehicle deal might make them more interested in the process and get them invested. Because you are getting money back, it might make it easier to negotiate the price. The dealer may have other options to make up the $1,000, such as lowering the interest rate or selling high-profit additional services like an extended guarantee. This is a bit like a game of hiding and seeking – you are focused on one thing, but the dealer has many ways to make a profit. You’ll get distracted or believe you are getting a better deal, leading to some profits in other areas. That’s their right.
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The second option is more beneficial for consumers. Let’s suppose that there is a slow-selling vehicle on the lot. A lender loaned money to the dealer to purchase that vehicle. The dealer hopes to make a quick profit and pay low interest. Dealers order the vehicles they desire based on information about what is selling well in their area and lot. Manufacturers may reserve models or assign models based on dealer performance, but it is up to the dealer to decide what vehicles will be on their lot most of the time. Sometimes, they make mistakes, or the car is not as hot as everyone expected. A car may sit longer on the lot than usual.
However, those cars that don’t sell can clog up your lot. These cars not only cost the dealer money but also take up space. There is still room for more factory cars. The factory doesn’t want the old inventory to clog up the pipeline between factory and dealer.
Another incentive that the manufacturer offers to dealers is the payment of a commission. A small financial incentive motivates the dealer to lower the car’s price and get rid of the old one to make way for a newer model. This is known as a “factory to dealer” incentive. It won’t be visible to you, the car buyer. The dealer might lower the price, but they may still ask for the full price and keep the money from the factory.
Although it can be difficult to find information about factory-to-dealer incentives, some websites do. They can be used to reduce the price of a slow-selling vehicle, as it is not money that the dealer makes.
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Similar rules apply to other manufacturer incentives. These are usually advertised. They can be used to lower the price of your vehicle. This is something that you should negotiate. They don’t affect the bottom line of dealers.
With either advertised manufacturer incentives or factory-to-dealer incentives, you can negotiate a fair price and subtract any rebates. If the dealer is ok with the price you negotiated, they can’t complain too much if you want to share in the manufacturer-provided bounty.
Let’s discuss low- or even zero-percent APR rates. The first is that you must have great credit to be eligible for them. The dealer hopes you will be so committed that you won’t want to walk away when the finance representative tells you you aren’t eligible. You will be emotionally invested.
The second is that almost all manufacturers will make you use their captive lenders, such as Honda Finance Services or Ford credit. This could be a problem or not.
The dealer wants to accomplish two things by using a low-interest loan. Clear out the inventory and make money on the other parts of the deal, such as the purchase price or any high-profit add-ons. This could include an extended warranty or undercoating services – neither do we recommend them.
There you have it. You’ll know what incentives are and how to use them.