This is part of Glossary of terms for car buyers series breaks down all the terms you need to know if you buy a new one or old car from one authorized dealer.
Car authorized dealer is not the business of giving away money. They’re in the game for money – and can you blame them? So do other people who sell consumer goods. So when you hear about an incentive (ie sale offlow interest rates or cashback offers), it’s a good idea to know what’s going on before assuming you’re getting your free lunch.
There are several main forms of incentives:
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Cashback or discount offer
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Low or 0% interest rate offer
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Promotion from factory to agent
At a very basic level, it is recommended to do one of two things for car seller: it gets people into the dealership and helps move inventory. Let’s look at both a little more closely.
The first part is basically the psychology of marketing. If you tell someone they can get $1,000 back when new car deal, it can get them excited (and invested in) the process. You can worry a little less about negotiating a discount because you’re getting your money back. And the agent has other ways to earn that $1,000 – increase the interest rate a bit or sell you some highly profitable add-on such as Warranty extension. It’s a bit like a game of shells – you focus on one thing, but the dealer has a number of ways to make money. The idea is that you’ll get a little distracted and or think you’re getting a better deal than they really are and they could make some profit elsewhere. And that is entirely their prerogative.
The second is a bit more useful to the consumer. Suppose there is a slow-selling car on the lot. The house has borrowed money from the lender to buy that car, in the hope of selling it for a quick profit so they can pay the minimum interest on the loan. Usually, dealers order what kind of car they want, using information about what’s selling well in their area and on their lot. Manufacturers will sometimes withhold or allocate models based on dealer performance or other considerations, but mostly it depends on what vehicle the dealer sells on the lot. Sometimes they do it wrong, or the car doesn’t get as hot as one would expect and the car sits a lot longer than usual on a lot.
But the cars that don’t sell will be very congested. They cost the house money, but more importantly, they took the place. The room can be occupied by even more cars coming from the factory. Since the factory wants to sell all the cars it makes, they don’t want the pipeline from the factory to the dealer and then the owner to be clogged with old inventory.
So, another type of incentive is the one paid by the manufacturer to the dealer. It’s basically a small financial relief, and some incentive to lower the price a bit and get rid of that old car to make room for a new one. This is called a “factory to dealer” offer. You, the car buyer, won’t see it. And maybe the dealer will drop the price a bit but maybe they will ask for the full price and pick it up from the factory.
It’s hard to find out about factory-to-reseller offers, but there are a few websites that list them. You can use them to give you a slight discount on a slow-selling car, because it’s not the money that comes from the dealership’s profits.
The same applies to other types of manufacturer incentives, usually advertised. You can use them to lower your car purchase price – that’s something you should negotiate. They also don’t hurt the house’s profits.
So with advertised factory-to-dealer or manufacturer offers, negotiate a low, reasonable price, then subtract any applicable discounts. If the dealer agrees to the price you negotiated, they can’t complain too much if you want to share the bonus offered by the manufacturer.
Finally, let’s talk about low or zero percent APR offers. There are two things required here, the first is that you must have excellent credit to qualify for them. The bookie hopes that you will be so committed to the deal that by the time the finance officer tells you that you are not eligible for it, you will not feel like walking away. You will be psychologically invested.
The second is that you will almost certainly be locked out of using a maker’s captive lending tool – like Honda’s motobike Financial services or Ford Credits, for giving you two random examples. That may be an issue for you, or it may not.
Really, the agent is trying to do two things with a low-interest loan: clear inventory or monetize other parts of the deal like the purchase price or the highly profitable additions associated with the delivery. Translate. The latter could be an extended warranty or a coating service – neither of which are recommended by us.
It is done. Deals are generally a good thing for savvy car buyers, and now that you know the basics of the three main types of offers, you’ll be better equipped to use them to your advantage. me.
