Do you sometimes feel like you have been taken to the cleaners while negotiating the price of a new car? Many buyers complain about having the same feeling. To take control of a new car purchase, you need some additional leverage for price negotiation.
That leverage comes from knowing what the dealer actually pays, or the dealer's invoice price, on a new car along with the various components reflected in a new car's sticker price or MSRP.
MSRP vs. Dealer's Invoice Price
To get to the bottom line cost of a new car, you need to know the difference between MSRP, or sticker price, and dealer's invoice price, or the dealer's cost from the manufacturer. Each reflects several cost components that add to their price. Federal law requires the listing of the information found on the window sticker of new cars. Known as a Monroney Label, it includes dealer costs along with visible incentives and rebates along with other vital information about the car.
Visible Dealer's Cost
When you look at a car's sticker price, you will see dealer's cost clearly printed on the window sticker. It might include costs for various options included in the specific model you are looking at, along with delivery costs. This price is what most dealers will set as their rock-bottom price. The majority of consumers assume that buying a car at "dealer's cost" means that they have made a great deal. In reality, the dealer has made a significant profit by selling a car at $1 over dealer's invoice, or when they sell it for less than dealer's invoice. How do they do this?
A holdback is a way that car dealerships offset the various costs of selling a car. Essentially, this is what pays the sales commission made by sales associate as well as other expenses related to selling the car. It is a percentage of the MSRP "held back" by the manufacturer when the dealer places the car into inventory, which is later returned whenever the car is sold. Dealers use holdbacks in three ways:
- Using the inflated invoice amount to borrow money for inventory purchases and operation costs
- Lowering gross profit, which in turn lowers sales commissions to employers to save on overall operating costs
- Advertising invoice-price sales using the inflated invoice price, while still making a significant profit.
Holdbacks are an invisible cost that consumers cannot see on the itemized sticker price of the car. The 2-3 percent holdback is just one of the ways auto manufacturers provide financial assistance to car dealerships in order to sell their cars. It is best to leave this subject alone when negotiating the price of a car, unless the dealer starts to give you the song and dance about not making ANY money on the deal you are negotiating.
Incentives and Rebates
Incentives and rebates provide additional assistance to dealers beyond that of holdbacks. Some incentives and rebates show up in the itemized sticker price on a car and others do not. Most dealers limit their price negotiations to visible incentives and rebates. However, they receive additional financial assistance from car manufacturers in several other different ways, including:
- Transfer balance
- Wholesale reserve
- Advertising credits
- Wholesale credits
- Flooring assistance
- Floor interest reserve
- Floor plan allowances.
These are hidden incentives that dealerships hope you never find out about. The net cost of the car, which is the true dealer's cost, includes these incentives and rebates. Educating yourself about the latest cash incentives, rebates and financing incentives helps increase your bargaining power when making a new car purchase.
True Dealer Invoice
Most buyer's feel pretty good about buying a car at just above the visible dealer invoice or even below that price. However, true dealer invoice is likely much lower than the visible dealer's cost on the window sticker. Four sites provide this information:
True dealer invoice is the printed dealer's cost minus any holdbacks, incentives and rebates, which the dealer receives as financial assistance from the manufacturer. To get the best possible deal on a new car purchase, you should negotiate from this price and give concessions upward, rather than starting at MSRP and negotiating downward.