With all of the fancy finance terminology surrounding the car-buying experience, the real heart of the deal can be difficult to find.
If you're shopping for a car, you might wonder if you're really saving money by taking an incentive or rebate, especially if the dealer says the price you're being offered is the best.
Incentives are simply programs offered by auto manufacturers to stimulate sales. They appear in manufacturers' advertisements with the intent to draw you in to purchase a car. They can come in a variety of forms, including cash rebates, low-interest financing, special leases, extended finance terms and/or even a first — or several — month's payment(s).
While low interest rates may entice you to come in to the dealership, note that the lowest interest rates — usually the ones advertised — are accessible only for those with spotless credit or those who agree to the shortest financing term, which is typically 36 months.
Keep in mind that rebates are offered by the manufacturer, not the dealer, so the dealer can usually afford to come down further from list price. In essence, don't let incentives keep you from further negotiating the price of your car. A car is a big purchase, and you'll be making payments on it for three to six years. Get the most car you can for the least amount of money. And always read the fine print.
If you're in the market for a best-selling automobile, you might be out of luck for incentives, since automobile manufacturers exclude their top-selling models year-round from incentives and rebates. For example, you'll search far and wide to find cash back on the perennial best-selling Toyota Camry and Honda Accord. Manufacturers figure that since these models sell so well on their own, why offer incentives?
Even after you settle on a good price or finance terms for the car, prepare yourself for more bargaining in the finance department. You might be offered a higher-end trim or more options, but make sure you really want those options before you agree to put them on your car.
Arm yourself with knowledge of the following terms before you walk into a dealership:
An incentive is cash refund or attractive lease or loan rate offered by an automotive manufacturer toward the purchase of a new vehicle.
A rebate is a partial reimbursement from the manufacturer, to either the dealer or buyer, for purchasing a vehicle.
The finance rate (APR) is the annualized cost of credit expressed as a percentage for a vehicle purchase.
Low-Interest Financing is a loan, offered by the manufacturer's captive finance company, at a below-market interest rate. Normally eligibility is limited based on the customer's creditworthiness.
Special Leases are offered by the manufacturer to stimulate sales by lowering the customer's monthly payment through subsidizing the vehicle's Residual Value or Money Factor (see below).
Residual Value, also known as the Guaranteed Future Value, is the leasing company's estimate of what the vehicle will be worth at the end of the lease term. The higher the residual that is used, the lower your monthly payments will be.
Money Factor is a reflection of the interest rate used in lease payment calculations (also called the "lease factor.") Money Factor is a method of expressing an interest rate that is more suited to computing your monthly payments. It is calculated by dividing the percentage interest rate by 2,400 (regardless of the length of the loan). For example, 7.2% interest expressed as a money factor is 0.003.
Of course, each incentive and rebate varies depending on the dealership/manufacturer. Check for special deals offered in your area.
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