Q: What is a Car Rebate?

December 17, 2013 12:53 PM

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Consumers need to make sound financial decisions when it comes to long-term obligations. That includes the purchase of a new car, which often represents a commitment that spans years. To ensure the best possible deal, you should take full advantage of the incentives offered to vehicle shoppers. One commonly advertised enticement is a car rebate, a substantial benefit under the right circumstances.

A car rebate is the return of cash to the buyer for agreeing to purchase or lease a vehicle. The inducement is normally used to increase demand for models with sagging sales. Depending on the automobile dealer's rebate program, you can receive the money in the form of a lump sum, or you can use it as all or part of a down payment. In some cases, it can be used to eliminate initial monthly payments. Although car rebates are usually associated with new models, they can be offered to help sell used vehicles as well. Legal definitions of what constitutes a new car differ from state to state, but the most common is a vehicle that has not been sold or titled outside of a dealership. However, odometer readings of new cars will vary depending on the number of test drives and whether they were used as demonstrators. Be sure to note a vehicle's actual mileage before accepting it as new.

As mentioned earlier, either a car purchase or a car lease can be eligible for a car rebate. Through a purchase, vehicle ownership can be obtained outright with cash or financed payments. Through a lease, the vehicle can be rented for a preset length of time with specific terms and conditions (e.g., prescribed insurance coverage amounts and penalties for over-the-limit mileage, undue wear and tear, and early agreement termination).

Regardless of the purchase or lease, you should calculate the vehicle's value versus bottom-line costs to determine if a car rebate is advantageous. You need to know how much the dealer has invested in the car before you can properly negotiate. Many buyers assume dealer cost is the amount paid to obtain the vehicle from the factory. However, it can also incorporate the cost of incentives, such as car rebates, special financing, and built-in lease options. The term dealer invoice is a better representation of the dealer's out-of-pocket expenses to bring the vehicle to the car lot. For example, if a vehicle's dealer cost is $36,000 and a cash rebate of $2,000 is offered, the car's price is $34,000. However, if the same vehicle has a dealer invoice price of $31,000 and is sold to you at $33,000 without a rebate, you would save $1,000.

Some dealerships offer a choice between low-interest financing and a rebate. Although reduced monthly payments are attractive to some buyers, car rebates can be especially beneficial if you need additional cash for the vehicle's down payment or for another purpose. They can also provide some budgetary relief by allowing you to skip the first few payments.

Rebate programs constantly change as vehicle manufacturers jockey for market share. In fact, dealerships in separate cities that represent the same automaker have been known to offer different incentives. Knowledgeable consumers have the best opportunity to benefit in vehicle purchases or lease transactions. A car rebate can be an effective savings tool if it is accurately factored into the total transaction.

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