How Sales Incentives Affect Used-Car Prices

Cash incentives on new cars have a far bigger impact on trade-in value when the money is used to cut the sale price instead of easing the cost of financing or leasing, the National Automobile Dealers Assn. says.

A $1,000 cash incentive on a new vehicle reduces its price a year later by $560, according to NADA's analysis. It estimates the used-car price would drop only $165 if the same amount had been spent to lower financing costs. The impact on resale would be $90 if the $1,000 had been applied as a lease incentive.

Still, consumers have a tougher time understanding the benefits of finance and lease incentives compared to a simple cash discount on the sticker price, NADA acknowledges. Says analyst Jonathan Banks, "Not all incentives resonate equally with customers."

The trade group calculates that incentive spending in the American auto market currently averages about $2,600 per vehicle sold. That's 3% higher than a year ago but 12% below pre-recession levels during 2004.

NADA says carmakers are better at understanding how incentives can affect used-car prices than they were before the recession. The association also predicts that spending on discounts will rise "moderately" next year, when sales growth is expected to slow.