Are model-year closeouts a good buy?

By Jim Henry

updated 10:49 a.m. ET Aug. 15, 2007

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 Edmunds.com. 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.

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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:

Price
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 Edmunds.com 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.

Styling
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.

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