Bargains Won't Go Away

The only problem is that the industry's short-term financing solutions have a way of boomeranging their way back in three or four years as long-term problems.

One reason that cash rebates are so popular is that a growing number of buyers need the money to pay off their trade-in vehicles. The percentage of car buyers who are upsidedown -- that is, who owe more on their trade-in than it's worth -- has increased substantially in the last three years, according to retail data collected by PIN. Since 2001, that figure has risen from 25% of buyers to 38%.

Their predicament is the result of manufacturers vying to keep buyers' monthly payments down by lengthening the terms of loans. The average term of a new-vehicle loan is currently 58 months, up nearly 10% from 53 months in 2001. This stretch-out makes it harder for buyers to build up equity, because they are paying less per month on the vehicle, which is a depreciating asset.

"Right now automakers are legitimately trying to sustain demand and market share through aggressive manipulation of finance instruments, but the long-term ramifications of these efforts are questionable," said PIN's Libby.

General Motors is usually the leader in incentives because it's trying to hold on to its 29% market share, said Schnorbus. The automakers doing the best financially use incentives the least, such as Honda(HMC Quote), which tends to produce below demand for its vehicles. The big three in this country, GM, Ford and DaimlerChrysler (DCX Quote), are overproducing, he said.

If interest rates continue to rise rise, buyers will probably see two changes in their financing options. Zero financing will disappear in favor of subsidized interest-rate financing.

And leasing, which hit its peak in 1998 but fell into disfavor with the rise of incentives, could make a comeback.