What Is a Cash Allowance When Buying a New Car?

If you've been looking at different ways to save money when buying a car, you might wonder, "What's the meaning of allowances?" Cash allowance is a term used by car dealers to refer to a manufacturer's promotional incentives that give you money back when you buy a car. These incentives are usually only available for the purchase of a new car and may apply only to select models.

A cash allowance is also known as a rebate, incentive or cash back option. New car dealers use this promotional tactic to encourage new car sales. The incentives range in value and are often used to move older model new vehicles off the lot. That means the make, model and options available to you through this type of promotion may be limited.

As the name implies, the dealer can give you cash when you take advantage of a cash back plan, though many buyers use the money toward their down payment.

Just as with any car deal, the interest rate, terms and loan amount you qualify for will be based on your credit score and your overall financial situation. Some loyalty or bonus cash back programs are offered exclusively to buyers making a purchase of the same brand; others are offered to customers who can show proof they own a competitor's model but are making a brand switch.

Dealers don't always offer rebates, dealer cash and incentives up front. Ask about it when you shop for a car, or, even better, know what manufacturers are offering before you set foot on a car lot. Sites like Edmunds.com allow you to search available rebates by ZIP code or car maker.

Note that you may be required to use the manufacturer's creditors in financing a car with an incentive attached, so crunch the numbers before making a final decision. If you can get a significantly cheaper loan elsewhere, it may outweigh the benefits of a rebate.

Getting a cash back incentive has the potential to cloud your judgment about what you're paying for a car and may make you less likely to haggle over price. Consider the rebate a perk and negotiate the price, rate and trade-in value of any other vehicle the same way you would if the incentive was not in play.

If you have great credit and are hoping to qualify for zero percent financing, you might not qualify for both a cash back incentive and zero percent financing. Do the math to figure out which option makes the most financial sense for you.

Don't fall for the dealer tactic of asking you what you want to pay each month; instead, focus on the price of the car. Otherwise, you might be steered toward a longer loan term with smaller payments yet pay more in the long run due to interest.

To reduce the total cost of the loan, try to make as large of a down payment as possible. It also helps to do some research before heading to the car lot so that you can get preapproved through multiple lenders – unless the allowance requires a specific lender – and land the lowest interest rate your credit profile and loan terms allow.