Cash Back Fever
Rebates! No-interest loans! Car makers just can't stop themselves. That makes today a great time to buy-if you know the right way to play the incentive game
By Lawrence Ulrich

(MONEY Magazine) – When recession and the aftermath of Sept. 11 threatened to stall auto sales three years ago, Detroit found a quick fix in rebates and 0% financing. It worked, but car makers soon found that every time they tried to go cold turkey on incentives, no one would buy. Now the average discount on a new car or truck has hit a mind-blowing $5,000. Even so, slower-moving models are piling up on dealer lots, as rising gas prices and tepid job growth make every sale a struggle. The market is so tough that many European and Japanese manufacturers that once spurned the incentive drug are turning into heavy users. Domestic makers are in even worse shape: The economics of union contracts forces them to keep factories humming, and the more they overproduce the more they have to cut prices. Discounts on large, gas-guzzling SUVs top $9,000 through a combination of rebates, special financing offers and incentive money from the automaker to the dealer, according to Luxury cars can be had for an average of $6,600 off sticker. Minivans and mid-size cars aren't hard to find at discounts of more than $4,000.

Automakers know incentives are killing profits, and they're promising to cut down. Don't believe it. Truth is, they're hooked, and the monkey on their back is making this fall a great time to get a deal on a car. Before you hit the showroom, though, remember: There's a big difference between a bargain and the bargain basement. Yes, a great car becomes even better with a rebate. But a mediocre car doesn't become great just because you can get it for less.

After the rebate, then what? You won't drive a hard bargain on an Acura TL. Knock a few hundred dollars off the $33,220 base sticker price, and you're doing great. Head down the road to a Lincoln dealer, though, and the smiling salesperson will dangle $6,000 or more to put you in a Lincoln LS V-8 that lists for $40,095. That makes the Lincoln the better buy, right?

Think again. By focusing on the up-front savings, you miss one of the most crucial elements of the total ownership picture: a car's eventual resale value.

The red-hot Acura is projected to be worth $19,600 after three years, a stellar 57% of its price when new, according to Automotive Lease Guide. That works out to one of the lowest rates of depreciation of any car in any class. Meanwhile, the Lincoln will have skidded to a $17,225 trade-in, a mere 42% of its sticker price, according to ALG. After five years, it'll fall to a shocking 25% of its original value, says Kelley Blue Book, with the Acura still holding strong at 48%. So even after the rebate, the Lincoln will cost you more and end up being worth less, and that doesn't count the psychic cost of spending all those years in an unremarkable car when you could have had a topnotch luxury sedan with superior performance and the latest technology.

"You don't buy a pink elephant sculpture just because it's on sale," says Jesse Toprak, director of pricing and market analysis for buying site

The Acura and Lincoln represent the two extremes in the incentive game: the full-price car that remains a good deal, and the giveaway that dealers are praying you'll take off their lot. In the middle are three opportunities to save money.

First, average vehicles that you would avoid at full price often become respectable buys once the rebate is factored in. Take the Chevy TrailBlazer, say, or the Ford Explorer, mid-size SUVs discounted by $4,500 or more.

Next are great cars that are nearing the end of their life cycle. The 2004 Honda Odyssey minivan comes to mind, especially when accompanied by a roughly $2,000 discount.

Then there are the biggest bargains of all: all-new models that stack up well in their class but are heavily discounted anyway. Take the Dodge Durango: Fully redesigned for 2004, available with the 335-horsepower Hemi V-8 engine, it's among the best three-row SUVs we've tested short of luxury territory. But with full-size SUVs hammered by high gas prices and tough competition from "crossover" car-based SUVs, Dodge has sweetened the Durango's price by about $7,500. Big incentives should continue into the '05 model year. If you need big-truck capability, that makes the Durango a terrific buy.

The smart way to shop The thing to remember about incentives is that they're not a gift: Car makers wouldn't offer you a dime if the model were strong enough to fetch full price.

Yes, a big incentive might be unrelated to a model's ranking and performance, as in the case of the Durango. At other times, an excessive rebate is a neon sign warning you to avoid a particular vehicle. Before you buy, you've got to determine whether the incentive outweighs the car's flaws. Here's a strategy for doing just that.

Start by looking at the critical standing of all the vehicles in the competitive set you're interested in. An hour or two of magazine reading and Internet clicking will reveal which models are held in high regard and which are also-rans.

Having eliminated the losers, you're now ready to start thinking about value. Note that the word is value, not price. Certainly, you should know what discount money is available on cars that you're thinking about. You can do that by going to manufacturers' websites and buying sites like But be sure to consider the total cost of ownership, including insurance, repairs and depreciation. This kind of information is now widely available on the Web. The depreciation ratings from Automotive Lease Guide, available at, are especially valuable.

Next look at the age of a vehicle. Automakers create "all new" versions of a model, meaning a full redesign, roughly every six years. In the interim, a model will get (typically minor) appearance and feature upgrades each year. As cars and trucks move through their life cycles, they often require bigger discounts to keep up with newer rivals. It's critical to know whether a vehicle is fresh bread or two-day-old doughnuts, and whether it's on the verge of replacement. That's because the arrival of a redesigned model sometimes creates worthwhile deals on an outgoing version. Other times, the new model is such a leap ahead in quality and technology that it renders the old one DOA, despite huge rebates from automakers desperate to unload their relics.

As mentioned earlier, the 2004 Odyssey is a perfect example of an oldie but goodie. A redesigned 2005 model went on sale in September with not a penny in rebates. But the new model brought with it the first significant discounts on the '04, which still ranked among the class leaders despite last being redone in 1999. If you don't need the latest and greatest, the 2004 Odyssey will be a smart buy, as long as the discount makes up for the eventual resale gap between the '04 and '05. (With '05s already in showrooms, walk away if a dealer won't grant a $1,500 to $2,500 break on an '04.)

In contrast, short of your winning one in a raffle, there's no reason to drive off with the 2004 Jeep Grand Cherokee. It has fallen far behind the mid-size SUV leaders, and a dramatically upgraded 2005 model makes its debut in October. Already the '04 is dropping to the bargain basement like an old Walkman in the age of the iPod.

Bottom line: Life is short. Car loans are long. Saving $25 or $50 or even $75 a month sounds nice, but don't go for an incentive that will cost you the performance or reliability of superior vehicles in the class. And realize that your rebate is instantly deducted from your long-term resale value; dealers are only too aware that no one is actually paying full price.

"The deal will fade, but the vehicle will be with you for years," says Tom Libby, director of industry analysis for Power Information Network, an affiliate of J.D. Power & Associates. "Get something that you'll enjoy, that holds its value, because you'll have to live with it down the road."

Once you've winnowed the field by quality, value and life cycle, schedule thorough test drives for all the cars or trucks on your short list. Emphasize to the salespeople you encounter that you're there to drive and compare, not buy. When you've found the vehicle you really want, stick with it. Close your ears to Uncle Bob and other self-appointed experts, especially if they're the type who always urge you to go with the lowest-price model.

When it's time to play dealership hardball, having one model and one model only in your sights will keep you focused. Solicit offers from several dealers. If the model you've settled on is discounted, so much the better—you're ready to snap up a legitimate deal. Don't assume that any advertised rebate is as low as a dealer will go; it's often possible to keep negotiating and drive the price even lower. Sounds easy, but too many buyers lose their nerve and get sidetracked by a mediocre car masquerading as a bargain.

There are other reasons for discount skepticism: With consumers now trained to expect a rebate, automakers are stealthily raising sticker prices so that the post-discount price looks better than it really is. GM, Ford and Chrysler all boosted retail prices five times in 2004, and more hikes are expected on '05 models.

And remember, it's not a rebate unless you pocket the dough. The typical discount may be a shocking 17% off sticker price, but most buyers use that money to move up to fancier models or pile on options. The result? Out-the-door prices are averaging about $24,800, up nearly 5% from two years ago. You may wind up with a glitzier car, but you're going to be dropping more money. Ask yourself some tough questions here, like do you really need the heated seats or six-CD changer?

Leasing: Ticket to Luxury Leasing has been down-and-out in recent years, thanks to cheap financing. As rates begin to rise, leasing is staging a modest comeback. And with rebates failing to do the trick on certain models, some manufacturers are again starting to slip incentive cash into their lease deals, a trend that's expected to continue through next year.

If you're the type who trades cars every few years and demands as little trade-in hassle as possible, some models are worth a look, especially in the ultracompetitive luxury end of the market. BMW has lowered the monthly payment on a 325i sedan to just $299 (though mileage is restricted to just 10,000 a year), and it's offering special deals on the 525i sports sedan. Both BMWs are among our highest-rated luxury models. Acura, Audi, Jaguar, Mercedes, Volkswagen and Volvo are also sweetening leases.

Even Honda and Toyota have been dangling lease deals on '04 cars. Honda's have included a Civic VP at $159 a month, an Accord LX for $199 and an Odyssey at $259.

Leasing typically costs more in the long run, it's true, but you don't have to lose sleep over depreciation. With Audi quietly pumping in more than $9,000 per lease to lower the payments on its magnificent new A8 luxury sedan, there's a dual benefit: You get a car that you perhaps couldn't afford to buy, as well as protection from Audi's traditionally lower resale values compared with BMW or Mercedes.

Once again, watch out for leftovers disguised as deals: The Acura RL and Land Rover Discovery are both getting the hook; their modern replacements—an all-new RL and Land Rover LR3—are on the way to dealerships. If you wouldn't buy a tired car, why would you lease one?


That 0% finance rate your dealer is offering sure sounds nice. But with rebates running into the thousands, you're usually better off taking the cash. (And if your credit isn't excellent, you won't get the 0% anyway.) Below you'll find out how much you would save in interest on a 48-month loan at 0% when compared with low, average and high rates for a new-car loan. If the savings is less than a cashback offer, grab the dough. To do your own calculation online, go to