Rebate Option: What It Is, How It Works, Types

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Updated January 23, 2023
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Chip Stapleton
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Reviewed by Chip Stapleton
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Chip Stapleton is a Series 7 and Series 66 license holder, CFA Level 1 exam holder, and currently holds a Life, Accident, and Health License in Indiana. He has 8 years experience in finance, from financial planning and wealth management to corporate finance and FP&A.
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What Is a Rebate Option?

A rebate option is an offer for a cash return on the purchase of a consumer good or service. Rebates can come in many different forms. Flat-rate rebates are automatically subtracted from the purchase price. Conditional rebates are only valid under certain conditions, such as "buy one, get one free."

Mail-in rebates typically require the consumer to mail in a form after making their purchase to collect the discount. The rebate option is sometimes called "cashback."

  • When you are given a rebate on a product or service, you pay the full payment upfront, but the rebate is retroactively paid to you.
  • A discount means you will pay less upfront, unlike a rebate.
  • Rebates will save you money by reducing the overall cost of an item or service, but you have to be willing to wait to receive it.
  • There are requirements in place for rebates, and often specific conditions must be met to receive them.

Understanding a Rebate Option

Businesses offer rebates for many reasons, mainly because they can be a potent marketing tool, drawing customers who are attracted to the prospect of receiving discounts on expensive items.

While businesses sometimes take a loss on a rebated product, they often make a profit even after the rebate. And even when they do take a loss, customers who purchase items with rebates attached may buy other items in the store, giving the business a net profit.

Additionally, some companies "price protect" certain products by offering rebates on others, hoping that sales of products with rebates will allow them to keep other products at the desired price point.

Another advantage of mail-in rebates for businesses is that they can provide valuable customer data.

Types of Rebates

Mail-In

Mail-in rebates are one of the most familiar types of rebates. Since they require a certain amount of effort, some consumers fail to take advantage of them. Many businesses take this into account when deciding to offer a mail-in rebate. Knowing in advance that only a certain proportion of customers will take the cashback, companies can estimate an average price reduction less than the rebate amount.

Vehicle Rebates

Rebates are commonly offered on new vehicles. Typically, the vehicle manufacturer pays for the rebate rather than the dealer, and then the manufacturer gives money to the dealer, which then transfers it to the consumer. By law, dealers must pass on the full amount of the rebate to the customer, provided the customer qualifies for it. Rebates sometimes harm the resale value of vehicles since they effectively lower their sticker price.

Rebates vs. Discounts and Reduced Interest Rates

Rebates are collected after payment, while discounts are taken before purchase. Discounts are more likely to be offered by retailers, while rebates are more likely to be offered by manufacturers, like automakers.

Reduced interest rates, meanwhile, affect monthly payments on large purchases like vehicles. For example, car shoppers are sometimes presented with a rebate and a reduced interest rate when purchasing a car. The rebate option will give the buyer more immediate cash in hand, but reduced interest rates can provide more significant discounts in the long run.