[January 27, 2009] Not all incentives are created equal, and many of them usually do far more for the seller than they do the buyer.
Incentives, in one form or another, have been around for decades. During today’s desperate economy, those incentives are more drastic – and far more dramatic – than ever. Just as when they began (in the late seventies, during another gas-crunch and economic downturn), they remain today no more than a sales strategy, designed more to move cars and trucks off dealer lots than to make “new friends” with buyers. Sadly, it’s not always in the buyer’s best interest to take advantage of incentives; some can do more harm than good, some do nothing at all.
In almost all cases, incentives are little more than a “we’re having a sale” signal to would-be (or might-be) buyers, implying that the bargains are theirs for the taking. All they have to do is come down to the showroom and take advantage of the great offer(s). Though these are extraordinary times, certainly requiring extraordinary measures (of both buyer and seller), we think you’ll find that the same old rules will (eventually) still apply.
Slow-selling models have always been prime targets for incentives, just as hot-selling models rarely see such enticements. At one point, not too long ago, incentives became such the norm that almost all models came with one sort of incentive or another: customers wouldn’t even consider buying anything that didn’t have a special offer or program. For a brief period – before the current gas price spike and world-wide sales collapse – manufacturers had actually adjusted new car and truck sticker prices to “reasonable” (competitive) levels, so that incentives wouldn’t be required, or at least wouldn’t be the norm. The reason: though they can move the merchandise when needed, incentives do two bad things for manufacturers. Not only do they diminish a manufacturer’s spirit – and reputation – they also depress both initial and resale values of its product.
As has always been the case, taking advantage of an enticing incentive on a highly-desirable model is a good move. But, with the exception of today’s market (where almost all product is not moving as projected), incentives on these cars rarely exist. And, if they do, it’s more than likely a gimmick of one sort or another.
The “Shell Game” (The Bad)
Low- to zero-interest rates have been around for years, but this is usually more gimmick than real savings. No lender is cutting your rate, just for the pleasure of lending you money. In almost all cases, the reduced interest cost is covered by some (or all) of the mark-up in the vehicle (mark up you might just as have easily have haggled down yourself, possibly even more than the amount “traded” for the rate) . You’ll notice, even today, that most incentives offer cash back OR low rates, rarely both. So, you may still be getting a good deal – especially if you’re buying a reliable car or truck, one that has good resale value – but it’s been dressed in such a way that you think you got a great one. If your only focus is on the rate, you may be missing something elsewhere.
Update [03|25|2009] See the Jalopnik article "New Cars Now Cheaper Than Used Cars" for more information about today's unusual & unprecedented pricing & value of some new & used models. In short, cash back combined with today's low rates make these great days to buy new. In some cases the prices for new models are at or below those of similar year-old models (which are also in short supply).
“Cash Back” (Rebates)
There’s a hidden cost to these offers. Interest rates aside, little sounds as enticing as thousands of dollars off your new car or truck, especially when the offer comes before you even begin the negotiation process! Even though you may very well have been able to haggle your way into a similar deal without the incentive, the “cash back” idea gets you in the door (and will probably lead to a sale). The drawback to this incentive is depressed values. Not only do rebates depress the value of the new model, they also depresses the value of used ones. For example, a new car “stickers” for $20,000, but you – and everyone else – can get $2,500 cash back. ‘Sounds great, doesn’t it? Unfortunately, you – and everyone else – has just bought a new car worth $17,500 – not $20,000 – and that’s before you drive it off the lot. To make matters worse, a late model used version of that $20,000 new car might sell for $15,000. But, if anyone can buy a new one for $17,500, few are going to pay $15,000 for a used one and, summarily, the value of that used car drops as well, and probably an amount roughly equal to the “cash back” offer (meaning this sample used could now be worth $12,500). In the long run, we’re not sure anyone really wins here.
Buy-Back Programs (The Ugly)
At least one manufacturer has recently announced a buy-back program. If you lose your job (after buying their new car), you can take the car back and they’ll let you off the hook. ‘Sounds great, doesn’t it? Sure, you don’t have to worry about paying for the new car you can no longer afford, and your credit report might not be damaged by late payments or repossession. But what will you drive afterwards? How will you manage your daily transportation needs, let alone look for (and get to and from) a new job? ‘Might be better to stick with what you’ve got, or get something you can afford whether you lose your job or not.
Don’t be blinded by the shiny sparkle of a new car spot-lit by an exciting incentive. What might look and sound good today can come back to haunt you later.