I uying a new car is all about making a deal. That may be why you go to a "dealer" to buy a new car. But there are all kinds of deals: good, bad, fair, lowest, no, easy.

Buyers seeking a fair deal need to do some homework before shopping. That gives them a better chance than someone who just walks in to a dealership cold. Remember, the dealer sales staff sells to customers every day, all week, year after year. They are pros; they do it for a living; they know what's on the lot.

Automobiles, just like AA batteries, floppy disks, and just about all consumer products, occasionally have rebates. A rebate is "a return of a part of a payment," according to one dictionary. The manufacturer offers it as an incentive.

Cars have
freshness dates, too.
Incentives for buyers and sellers
There are two kinds of incentives: one to buy, and another to sell. Not all rebates, you see, are aimed at buyers. Manufacturers offer dealers rebates, too. Sometimes, a particular car has both kinds of rebates.

Bruce Belzowski is a senior research associate in the Office for the Study of Automotive Transportation at the University of Michigan Transportation Research Institute in Ann Arbor. He knows rebates as part of his study of managing brand names and developing new automotive products in the industry.

Belzowski says, "Price decreases are seen as permanent, while rebates are seen as temporary." Rebates aim to correct a problem of cars already built, but not being bought. Maybe the equipment combination is not appealing. Colors that were popular last year are "out" now. But often, the problem is just price.

Rebates are about "moving the iron," in the jargon of the industry—that is, moving cars into the driveways of buyers. Selling cars is the game, and the quicker the better.

Rebates to customers usually take two forms: cash back, and reduced interest rate on the car loan. With a cash rebate, the buyer can apply it to the down payment to reduce the loan principal. Or, literally, the buyer can get cash back—a check from the manufacturer.

Rebates can be regional, not national, if the manufacturer has excess supply in just one area of the country. In fact, there can be regional and national rebates with different details.

Interest-rate complications
A reduced interest rate on your new-car loan gets more complicated. The rate usually only applies through the manufacturer's credit organization. Belzowski says that sometimes, though, a low annual percentage rate (APR) may be across all models of a certain make, while a cash rebate is limited to specific models.

Available interest rates, whether credit union or car maker, usually vary with the length of the loan period. A rate for a 36-month loan is less than one for 60 months.

A reduced interest rate doesn't have the effect on monthly payments that you might expect. For example, say you're comparing a typical reduced interest rate of 1.9% with a 7.75% credit union rate on a $10,000 loan. The reduced interest rate reduces the monthly payment by about $26 a month, regardless of whether it's a 24-month loan or a 60-month one. That's not to say that amount doesn't add up over the life of the loan, however.

Cash back of $1,000, applied to the down payment to reduce the amount of the 7.75% loan, drops the payment by $45 a month on a 24-month loan. That difference slips as the loan time increases. (See "Monthly payment calculation" table.)

Monthly payment calculations
Loan% APRMonthsPayment
$10,000             7.75% 24 $451.13     
 10,000             1.924 424.96     
9,000             7.75 24 406.02     

10,000             7.75 36 312.21     
10,000             1.9 36 285.99     
$9,000             7.75% 36 $280.99     
The cash back can be a better deal if it means shortening the loan pay-off by a year vs. the loan needed without the rebate. That way you can choose your own lender.
       are about
     "moving the iron"
       ... the quicker
       the better.

Rebates to the dealer
Dealers don't have to share their rebates with anyone, but sometimes they do. "Dealers like rebates. They're not commonly known to everybody. There may be a rebate on a vehicle that a dealer may not tell anybody about, unless they need it."

That Belzowski comment explains why buyers have to do their own homework. Most sellers won't be volunteering information.

Doing some math on loans, interest rates, and rebates is only part of a buyer's challenge. Tracking down the available rebates means some research. The only available periodical for that is the weekly industry newspaper, Automotive News. A current list of "customer incentives" and "dealer incentives," with expiration dates, is near the back of every issue. A big city's public library often will carry Automotive News.

Finding Internet rebate information

Then there's the Internet. Internet lists often won't have information about dealer rebates. If this is the way you do your research, checking sources against one another is a good idea.

For automotive rebates on the Internet, check:
Some of these sites are handy for another reason: They give invoice and suggested retail prices too, and holdbacks—the percentage of a car's invoice price that's refunded to a dealer after the vehicle is sold. Holdback is why dealers still make money selling cars at close to invoice price.

Shopping for stale inventory
We all know about "sell by" freshness dates at the supermarket. Cars have freshness dates, too. The safety standard certification sticker on the edge of the driver's door or door post lists the month and year of manufacture. On top of a rebate, if you're not too fussy about color and equipment you may be welcomed with open arms if you ask to see a dealer's "oldest" new cars.

Turning inventory is so important that another term pops up—turn and earn. To get the hot sellers dealers need to sell some of the vehicles that buyers aren't asking about. By turning a unit, they earn credit to be able to order another one, often one that's more appealing.

Manufacturers put rebates not only on current models, but on the previous year's models that remain unsold. Once a car or truck has been built, it's going to be sold—there's no turning it back into the raw materials and starting over. The only question is when and to whom.

As of the beginning of calendar year 1999, there were customer rebates on 10 different makes of 1998 models from $500 to $3,500; in addition, dealers had incentives, ranging from $500 to $3,000, on two 1998 makes.

Rebates are for slow sellers
You won't usually see rebates on popular models like Ford Explorer, Honda Accord, or Toyota Camry. If ever there's a time, though, to look for rebates, it's in December. Also look for them whenever a manufacturer is introducing a new model to replace an old one. That's not always late summer and early fall anymore.

While cars are built on a model-year basis that may be more or less than 12 months, the annual sales time is by the calendar. So all figures for best-selling car of 1998 includes sales from two model years, but one calendar year. Many of the recent end-of-year rebates expired Jan. 4, 1999, the Monday after New Year's Day.

"The consumer is at a disadvantage," says Belzowski. If a dealer knows he or she will get another $5,000 from a manufacturer for selling just one more car [in the week, month, or whatever], "the next person who walks through the door is going to walk out with [that manufacturer's brand] whether they want it or not."

Columnist John Fobian is an automotive writer and engineer.
     A reduced
     interest rate
     doesn't have
     the effect on
     monthly payments
     that you might expect.

©1999 Credit Union National Association Inc.