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Are model-year closeouts a good buy?

Depending on your tastes and needs, buying an outgoing model just before it's replaced by a new one can be a good deal. But holding out for newer versions has its own rewards. What’s best for you?
Honda wants to attract customers with higher-than-usual discounts offered before the typical model-year vehicle clearance events.
Honda wants to attract customers with higher-than-usual discounts offered before the typical model-year vehicle clearance events.Honda
/ Source: Forbes Autos

It’s not exactly Christmas come early, but automakers have gotten a flying start this year on model-year blowouts. At dealerships around the country, 2007 models are being hustled off the lots to make room for the incoming 2008 models.

In particular, Honda and Toyota are trying to attract customers with higher-than-usual discounts offered seemingly earlier than ever, well in advance of the typical model-year clearance events. Honda’s average incentive per vehicle sold in July was $1,146, versus only $896 in July 2006, according to Toyota’s average incentive per vehicle hit $1,492 in July, up from $1,009 a year earlier.

Vehicle incentives can vary. They aren’t always just money off the sticker price. Import brands like Honda often prefer to offer discounts in the form of cut-rate leases, as opposed to customer cash rebates, which have been popular with domestic manufacturers. “We don’t offer cash at all, as a matter of policy,” said Honda spokesman Chris Naughton.

That’s partly to avoid the appearance of a fire sale, but also because, according to registration data from the automotive research company R.L. Polk & Co., leasing is more popular on both coasts, where import brands sell the best. In the Midwest, people are less likely to lease or buy imports.

Through Sept. 4, Honda is offering a $199 per month lease for 36 months on the 2007 Accord four-cylinder coupe, with $2,399 due at signing, according to Honda’s website. That's the leasing equivalent of almost $3,000 off sticker price. Acura is also offering cut-rate leases or low-interest financing.

The fine print for the Accord lease puts the MSRP at $21,870, and the net capitalized cost is $18,895.89. The latter is the leasing equivalent of the amount financed on a loan, i.e., the amount of money borrowed.

Buyers can negotiate with dealers on the difference of $2,974.11, which would typically include things like a down payment, first month’s payment and acquisition fee, Honda's Naughton said. But the unspoken suggestion is that dealers are highly motivated to get people into the $199 lease.

Uncharacteristically, Toyota is also offering leases as low as $199 on the 2007 Camry. Luxury import brands including Infiniti, Lexus and Mercedes-Benz are likewise advertising “summer specials,” which often last until it’s time for model-year clearance sales, which themselves then segue into December clearance events.

In other words, with 2008 models on the horizon, and deals to be had on 2007 models, it’s a good time to be a car buyer. The question is, what’s the better deal, buying the last of the '07s or the first of the '08s? It turns out, there’s no wrong answer; both have advantages, depending on your tastes and needs. Keep reading to find out the benefits of buying either the last of an outgoing model or the latest introductions.

Reasons to buy an outgoing model:

Without a doubt, outgoing models are going to be less expensive. Discounts on most 2007 models should reach a peak in the summer and early fall, based on historical data from and Bandon, Ore.-based CNW Marketing Research. Once new models arrive, dealers will want to quickly sell any remaining '07 inventory so that they can charge full price on new '08 models. It’s much harder to get buyers to pony up full price on the latest vehicles with the outgoing ones sitting on the lot, especially if they look just like the new ones. The more old models dealers can move out, the better their chances to make more money selling the new ones.

“A year ago, [Toyota] had a new Camry and a new FJ Cruiser. Margins hit a real sweet spot,” said Earl Hesterberg, president and CEO of Houston-based Group 1 Automotive Inc., the fourth-largest U.S. dealer chain. That is, the 2007 Camry was newly redesigned, and the FJ Cruiser was a completely new model, with no previous model to stagnate on the lot. From the dealer’s point of view, this “sweet spot” meant charging their customers top dollar, and getting it.

If an “old” model was redesigned recently, like the Camry in 2007, it’s unlikely that the new model will look all that different. It may have been tweaked in some ways, but, for the most part, opting for the old model doesn’t mean sacrificing much, styling-wise. In the end, you can save a bundle on a car you like to look at.

In fact, although redesigned models are often touted for their groundbreaking designs, sometimes people actually prefer the styling of an existing model, simply because they’re used to it. At first glance, a reworked model can seem over-designed, and even radical compared to the vehicle it’s replacing. And not necessarily radical in a good way. For instance, BMW has toned down the supposedly controversial styling of its 7 Series, which was redesigned in 2002, a possible sign that customers were turned off by the new look.

Because new or redesigned models are often more sought-after, they can be hard to come by, meaning customers may have to get in line to buy one. With outgoing models, this isn’t a concern. In fact, outgoing models are often a little too available, which is another reason dealers want to move them. Here’s how it works: Dealers borrow money to pay for the cars that sit on their lots. For every day that the cars sit unsold, they accrue more of what the industry calls “floor plan” interest charges. According to the National Automobile Dealers Association, rising interest rates meant that dealers paid an average of about $160 in floor-plan costs for every vehicle they sold in 2006, roughly double the year before. Thus, dealerships want fewer cars on their lots because it means they are spending less money.

Toyota is calling its summer promotion “Lots on the Lots,” a name that suggests Toyota dealers have too much inventory. This is good for potential car buyers, but not so good for Toyota. In fact, it’s symptomatic of larger problems. “Import inventories are higher than we would like, mostly because of softer sales for Honda and Toyota,” said David Cosper, CFO for Sonic Automotive Inc., Charlotte, N.C., the nation’s third-biggest dealership chain. Toyota Division reported that its sales dropped 3.5 percent in July, compared to the same month one year ago. Honda Division said it slipped 1.2 percent in July.

No matter how rational the reasons for buying an outgoing model may be, some people just can’t resist being the first on their block with the latest car. This decision doesn’t have to be purely emotional — solid arguments can be made for holding out for the newest models, even if they cost more.

Reasons to hold out for a new model:

A “redesign” is the industry term for an all-new model with the same name as the old model, and it’s probably one of the top reasons that people choose upcoming models. For example, the 2008 Honda Accord will be an all-new model, with new styling and new features, if we believe the concept car sneak peek at the New York International Auto Show. Honda says that the new Accord is much more aggressively styled and designed for better crash safety and improved gas mileage. If the hype holds true, then buying a new model means getting a better car.

Resale Value
Simply put, newer vehicles are worth more. For lease customers, it’s especially important to select a car with the best possible residual value, which is the car’s predicted value at the end of the lease based on its depreciation over time. When leasing, the customer is essentially borrowing the difference between the upfront cost and the residual.

According to historical data from Automotive Lease Guide, Santa Barbara, Calif., a widely used residual value benchmark, residual values are best when a model is new, and likely to fall when a model is replaced, or about to be replaced, with an all-new model. Lease numbers then could be a little bit better on the newer model. However, some dealers will occasionally offset the lower value of an outgoing model with a lease discount.

As usual, dealers will be hesitant to sell below the manufacturer suggested retail price (MSRP) at the start of any model year. But before long, the 2008s are likely to be on sale, too. said that as of Aug. 1, Mini is the only brand in the industry offering virtually no incentives. In addition, luxury import brands tend to have their biggest discounts in December, when they are trying to hit their calendar-year sales targets. At that point, when the new-model buzz has died down, it’s quite possible to get that new vehicle for less.

Based on historical data from and CNW Marketing Research, clearance sales usually start closer to the traditional model-year changeover, in September and October. Honda won’t introduce the all-new Accord until October, but it has already started discounting the 2007 model late in the second quarter. “Dealers are pushing an aggressive target” for Accord sales, said Roger Penske, chairman of the Penske Automotive Group in Bloomfield Hills, Mich., the nation’s second-largest dealership chain.