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Buying a New Car: Why Do Automakers Offer Incentives?

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author photo by Doug DeMuro

If you're thinking about buying a new car, you've probably run across automaker incentives, also known as special offers or manufacturer deals. Essentially, these offers tout money off, cash back or low-interest financing to provide an incentive for you to buy the car. But why do manufacturers offer them? And why do they vary so greatly from month to month? We're examining incentives for curious car shoppers.

Why Incentives?

Car shoppers often wonder why automakers even bother with incentives. Why not just lower the price of the vehicle instead of saying the price is a certain amount and later advertising $2,000 cash back?

While the decision to offer an incentive can be complicated, there are two main reasons why it's done. The biggest is to control inventory levels. For example, an automaker with an all-new car coming out for the 2014 model year might want to clear out the remaining stock of 2013 models before the new model arrives. As a result, that automaker will offer incentives to help convince buyers to purchase outgoing 2013 models, making sure that dealer lots won't be full of hard-to-sell old models when the new car shows up.

Incentives are also offered to help spur sales in the face of new competition or an aging design. If you're an automaker and your car came out in 2011, you might start advertising big incentives in 2013 or 2014. That's because newer cars with more advanced equipment and more style likely came out after yours, and that means you'll need to give buyers an extra incentive to consider your car over new challengers.

Why Do Incentives Change?

If you spend a lot of time doing research when thinking about buying a new car, you've probably realized that incentives can change from month to month, and they often change a lot. An automaker might offer $1,000 cash back on a car during one month, for instance, and then offer no incentive the following month. So why the fluctuation?

The biggest reason why incentives change from month to month is, once again, inventory levels. If an automaker's $1,000 cash-back incentive is successful in January, for example, there may be no need to offer the incentive, or any deal, in February. That's because the automaker has reached its target, and excess inventory is gone.

Incentives also change wildly based on the time of year. If you're searching for a car in early 2013, for instance, you'll find huge incentives on 2013 models, even if there's no all-new model due for 2014. That's because automakers want to clear dealer lots for 2014 models, which will sell more quickly and easily than last year's car. Wait until the fall and you'll start to see incentives creep up on 2014 models, as well.

Does an Incentive Mean That a Car Is Bad?

Considering that incentives are usually offered when an automaker feels its dealers need extra help to sell a car, many shoppers believe that cars with incentives aren't good cars. After all, if they were so good, why do they need money off in order to sell?

The truth is that excellent cars are offered with incentives for many reasons. In some cases, it's because a car is about to enter a new model year or it's about to be replaced, neither of which signifies that a car is bad. Sometimes dealers are oversupplied; other times, automakers just want to reach certain sales goals.

In the end, there's no need to stay away from a car just because it's offered with incentives. Instead, we suggest cashing in, as you can often find excellent cars with great deals available before you even sit down to negotiate.

This image is a stock photo and is not an exact representation of any vehicle offered for sale. Advertised vehicles of this model may have styling, trim levels, colors and optional equipment that differ from the stock photo.
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Buying a New Car: Why Do Automakers Offer Incentives?