Cash back offers, also known as a rebate, are automatic price discounts deducted from a vehicle's selling price. Rebates are offered from the manufacturer, not from an individual new-car dealer, so you should still plan to negotiate your sales price. Rebates don't usually offer a sales tax deduction, despite the reduction in sales price.
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Cash back offers are advertised on manufacturer websites. The discounts are offered by the manufacturer and usually, you only need to purchase the vehicle to take advantage of the discount. Read the fine print in the advertisement to ensure you don't have to apply to the manufacturer's bank to qualify. Manufacturer banks often require a higher interest rate. If no restrictions apply, you can pay cash for the vehicle and still receive the discount. Check the expiration date of any offers you find, as most offers change monthly.
Interest Rate Offers vs. Cash Back
Most cash back incentives are offered in lieu of special financing, meaning you can take the automatic price discount or obtain low interest rate financing, such as a 0 percent loan. If you plan to finance, check your overall loan payback costs; the interest rate discount and a cash rebate often offer the same amount of savings. To determine which offer saves you the most money, use an auto loan calculator. Your total savings also depend on the financing term you choose and your down payment amount.
Tax Considerations
Most states do not recognize cash back incentives as a price deduction before applying sales tax. Even if you purchase a vehicle with a $5,000 cash back offer, expect to still pay taxes on the vehicle's sticker price. Budget for your tax payment; it can add thousands to your purchase price. If you purchase a $20,000 vehicle and pay an 8 percent tax rate, your tax equals $1,600. Cash-back incentives are similar to a down payment; most states do not recognize a down payment as a reduction in actual sales price.
Dealer Negotiations
No matter how large of a cash-back incentive you receive, you should still negotiate your vehicle's sticker price. Cash discounts are offered from the manufacturer, not the dealer. The dealer is reimbursed for applying manufacturer rebates. Without further negotiating, the dealership you purchase from makes full profit from your car sale. Most states recognize a reduction in vehicle sticker price before applying sales tax. For example, if you purchase a $30,000 vehicle and negotiate $3,000 off of the sticker price, you'll pay tax on $27,000 instead. Your cash-back offer is then deducted from the purchase price after tax is applied, much like a down payment.
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