Why Do Car Makers Offer Incentives?

The main reason car manufacturers offer incentives is to help boost sales of slow-moving models.

There are over 300 different models of cars, trucks, and SUVs available for sale in the U.S. (thousands if you count all the different trim levels) and there's no way each one is going to meet its original sales target. So it's natural that some cars sell better than others.

One of the strongest ways to motivate buyers is to reduce the price of the vehicle. This can be done in several ways, the most common of which is to offer cash-back rebates.

Manufacturers don't like having to offer cash rebates because it's usually a sign that a car isn't selling well. The higher the rebate, the worse the sales. If a brand new model is offering incentives, that's a clear sign that it's not hitting initial sales goals.

In order to disguise the fact the car isn't selling well, some manufactures prefer giving incentives via "hidden" avenues, such as dealer incentives and low APR financing. Hidden dealer incentives are bonuses that are given directly to the dealer whenever they sell a slow-moving model. You'll find that most luxury car brands tend to prefer these types of incentives in lieu of cash back rebates.

Many dealers pass this bonus to the customer in the form of a lower purchase price. This way, the manufacturer saves face while still providing a boost in sales. Sometimes car incentives are provided merely as a competitive tool and not necessarily to help sell slow-moving models.

Every now and then, an incentives war will break out among competing brands. When this happens, manufacturers feel pressured to offer some incentives as a way of keeping or gaining market share against competitors. Usually, these types of incentives are kept small and will be on popular models in the form of cash back rebates and leasing deals.

A final reason car incentives are used is to clear out year-end vehicles to make room for next year's models. These are common after September and are usually in the form of hidden dealer bonuses, which are usually passed on to the consumer. The largest incentives are reserved for leftover models where the incoming model is newly redesigned. This occurs every 4 to 6 years for each brand, so it's good to know when these changeovers are due.