If you're interested in buying a new car, you've likely come across incentives, also known as special offers or rebates. So what exactly do these things mean? We have the answer.

What's an Incentive?

The simple answer is that an incentive is a special offer designed to get you to buy a car, but it's a little more complicated than that. Automakers use incentives to balance inventory or to clear out excess stock of certain models. For example, just before cars for the 2015 model year arrive, an automaker might put extra incentives on 2014 vehicles in order to clear them out of dealer inventory. That will help spur sales of 2014 models so there won't be any left over when the 2015s reach dealers.

As a result, most automakers offer incentives one month at a time, with no hint as to what's coming in the following month. A successful incentive will clear out inventory, meaning that automakers may not have to offer the same incentives from month to month. On the other hand, if an incentive isn't completely successful, an automaker may increase incentives to try to clear out the remaining inventory.

Unfortunately, this guessing game means it's hard to know when you should buy a car. Wait until next month, and last month's incentive may be gone, meaning that you'll end up paying more for the car. Buy now, and next month's incentive may be even better, meaning you should've held out for a little longer.

What Kinds of Incentives Exist?

When it comes to buying a new car, there are three major types of incentives: finance offers, lease offers and cash-back offers. Finance offers apply to shoppers with excellent credit looking to finance a vehicle. These deals usually tout low interest rates, sometimes as low as 0 percent, which the automaker hopes will entice shoppers.

Lease offers are, not surprisingly, offers for leasing a vehicle. These usually come in one of two forms: a lower monthly payment than you'd typically get, or a special deal that requires no money down at lease signing. In either case, drivers looking to lease might be swayed to choose a certain car because of a good lease deal.

Finally, cash-back offers are deals given to drivers paying in full for a new vehicle. Often, these deals come in the form of simply giving money back. In other words, a shopper who's getting $1,500 back on a $25,000 car will only end up paying $23,500 for the vehicle. It's important to note that these deals don't only apply to shoppers who are paying in full but rather to nearly any driver who has secured financing from a source other than the dealer. For instance, if your bank finances you, you'll be presenting a check from your bank to the dealer for the car's full purchase price. In that case, the transaction will look to the dealer like a cash sale, and that means that you can take advantage of cash-back offers.

Dealer vs. Manufacturer Incentives

While most of the above points relate to manufacturer incentives, it's important to note that dealers can also offer their own incentives. These usually go above and beyond manufacturer deals, meaning that you can often take advantage of both offers. Dealer offers, however, are usually not as large as manufacturer deals and often include free items such as skis for an SUV, local restaurant gift cards or a gas card that gives you a few free fill-ups with the purchase of any new car.

author photo

Doug DeMuro has a wide range of automotive industry experience, from work at a Ferrari dealership to a manager for Porsche North America. A lifelong car enthusiast, Doug's eclectic vehicle purchases include a Porsche 911 Turbo, an E63 AMG wagon, an old Range Rover and a Mercedes Benz G-wagen.

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