How Car Rebates and Incentives Work

One of the most popular types of incentive that car makers offer are new car rebates. New car rebates are those popular cash back offers that you've probably heard being advertised: Buy a car and get cash back. The rebate amounts can range from a few hundred to several thousand dollars.

Most people don't walk out of the dealership with the keys to a new car and several thousand dollars of the dealer's money in his or her pocket (not legally, anyway). Instead, the rebate is applied to the cost of the new car. So, for example, if you're looking at a new car and you and the dealer agree on a price of $20,000 for it, and there's a $3,000 cash back rebate offered on the car, instead of paying $20,000, you end up paying $17,000. Think of cash back new car rebates as a sort of coupon for a discount on the car's price in the amount of the rebate. However, when you go to the dealership, don't be blinded by the rebate. Negotiate the price that you're willing to pay for the car before the rebate. With a combination of a rebate and your negotiation skills, you might be able to save even more than the rebate. In the example above, you and the dealer agreed on a price of $20,000 for the car before the rebate was applied -- that's something that's very important to do. If you're shopping a $22,000 car and can get the dealer to agree to a price of $20,000 before the rebate is applied, you'll save a total of $5,000, even though the rebate was just $3,000.

When you're looking at a car, dealers will probably let you know about the rebate up front. But, to save the most money, politely let them know that you appreciate the information, but that you want to settle on a price for the car before you talk rebates and incentives.

While rebates on new cars are common, and tend to come from the car maker itself, you can also get rebates on used cars. These tend to be less common, and the money for the rebate is coming from the dealer, not the car maker. Still, the effect is the same for you: money saved off the price of a new (used) car.

Why are used car rebates less common than new car rebates? With new cars, things are more uniform. Let's say a dealer has six brand-new Honda Civics on the lot. With a brand new car, the manufacturer and dealers have the same costs, no matter which car they sell. They know exactly how much they can sell the car for, including rebates, and still make money in the process.

But, if a dealer has six used Honda Civics on the lot, those used cars will vary -- a lot. They'll all have different mileage, chances are they'll all be from different years and they'll all be in different condition, too. Each used car is worth a different amount, so it becomes a little more complex for the dealer to figure out what kind of rebate to offer while still making money. As a result, used car rebates tend to be offered on individual cars, while new car rebates tend to be applied to entire model lines.

Used car rebates also tend to be smaller than new car rebates. Still, since you save so much buying a used car over a new one, getting a used car with a smaller rebate often makes more financial sense than getting a new car, no matter how hefty the new car rebate is.

So far we've only talked about rebates that come from the car manufacturers or the dealers. But sometimes the government offers a rebate for buying a car. Even when it's the government offering the rebate, the reason and the effect is the same: The government wants to increase sales of a particular model and consumers save money in the process.

Currently, the government offers rebates to some consumers who buy hybrid and alternative fuel cars. The rebates are given because the government wants to encourage people to buy this form of technology. The idea is that if more people drove hybrid or alternative fuel cars, the country would use less gas and we'd ultimately have less air pollution, too.

However, while most rebates on cars are applied directly to the purchase price, the government rebates on hybrid and alternative-fuel cars are applied for through the state or local government after the car is purchased. Most dealers can help you do that, however, so the process is pretty easy and you save money.

While rebates on hybrid and alternative fuel cars vary by state, the federal government offers tax credits on some hybrid and alternative fuel car purchases. While that doesn't directly bring down the cost of the car, it still means a net savings for the year, since your federal tax bill will be reduced.

For example, if you buy an electric car like the Nissan Leaf, which is due to be released in the fall of 2010, the federal government is currently offering a tax credit of up to $10,000 in some communities. For most people, a $10,000 tax credit could significantly reduce their overall tax bill and make buying a hybrid or electric car much more affordable. For hybrid cars, you can currently get a tax credit of up to $3,400 (depending on the make and model hybrid you buy).

Rebates aren't the only way to save money when buying a car. Car makers and dealers offer lots of new car incentives beyond rebates. One of the most common offerings is low-interest financing. When low-interest financing is an option, that means that dealers and manufacturers have partnered with lenders to offer special loans to buyers of a particular vehicle. Many times, those loans are for zero-percent interest.

Since most people have to borrow money to buy a new car, being able to borrow money at zero-percent interest is a big savings. That's because when you borrow money, the interest rate is extra money you have to pay back on top of the money you borrow. In effect, having interest on a loan increases the car's price. For example, if you borrow $20,000 to buy a car at 5 percent interest, over the life of the loan you'll actually end up paying $24,000. However, with zero-percent interest, that extra money is removed. If you borrow $20,000, you'll only have to pay back $20,000.

Usually, consumers are offered a choice between low-interest financing and a cash-back rebate. It's rare that you can take advantage of both. Before you decide which option is the better deal for you, figure out how much money you'll save in the end with low-interest financing. It may end up being more than the cash back rebate.

Other new car incentives you can take advantage of are special leases, where the monthly lease payment is reduced or the money due at signing is reduced. Sometimes dealers will even offer other incentives, like free maintenance or free options (like a free DVD entertainment system) on the car.

While new car rebates and incentives are great, you still need to be an educated consumer. Before you head into the dealership, understand what discounts and incentives are available to you. It's also good to know what a good price for the car you're looking at truly is. And always negotiate the price before any rebates or incentives are applied. Then, all you have to do is drive off the dealer lot in your new car with a smile on your face.

For more information about car rebates and incentives, follow the links on the next page.