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10 Minutes spent here could save you $ thousands

The Truth About Car Pricing

Print these pages and study them!

Car/truck pricing is a confusing subject. Not only that, but cars are expensive, and a car purchase lives with you for a long time. Reading and understanding the content of this article could save you hundreds of dollars if you're thinking about buying a car. We will discuss the following subjects:

• Dealer Invoice/MSRP
• Destination Charges
• Dealer Holdback
• Factory Incentives
• Dealer Charges
• Target Pricing

DEALER INVOICE/MSRP

Initially the dealer is billed "Dealer Invoice" for a vehicle. This is the reference point for all your calculations. It is shown as the INV. of the vehicle. MSRP refers to the "Manufacturer's Suggested Retail Price." The difference is usually between 8 to 15 percent. When you start calculating the price you are willing to pay for the vehicle of your choice, you should get as close as you can to the "Dealer Invoice" of the vehicle and ALL of its options.

Invoice and MSRP prices we quote are updated regularly. Some changes in option packages or discount upgrades or downgrades occur at the manufacturer's discretion. There will be variations at times, BUT beware of dealers who tell you the prices found on this website are "way out of the ballpark." It is highly unlikely.

NOTE: Some manufacturer's invoices now include charges for Advertising, Certificate of Origin, and Consumer Communication Programs as items on the invoice. Previously these items, although they do represent legitimate costs, were included in the price of the car. These are non-markup items; i.e., a $1.00 invoice charge for a certificate of origin adds $1.00 to the invoice, but not to the MSRP of the car. In the case of advertising, the dealer previously had to pay these amounts in addition to the invoice price for the car. Now advertising is included in the invoice price and as an item on the invoice.

DESTINATION CHARGES:

Destination charges are predetermined charges to the dealer for the delivery of a specific vehicle to a specific destination. These charges are shown at the bottom of a dealer's invoice and at the bottom of the window sticker on the car. There is no markup on freight, and the amount listed must be paid by the dealer to the manufacturer.

DEALER HOLDBACK:

Dealer holdback is a specific percentage of the car's price that is credited to the dealer's account periodically by the manufacturer and reduces his cost by 2-3%. As you can see, 3% on a $20,000 car is substantial - $600. The dealer could sell you the car at his invoice and still have $300 to $600 profit in the deal. Remember this when you are getting down to the final price.

Holdback:

what it is and what it means

DEALER HOLDBACK: Dealer holdback is a specific percentage of the car's price that is credited to the dealer's account periodically by the manufacturer and reduces his cost by 2-3%. As you can see, 3% on a $20,000 car is substantial - $600. The dealer could sell you the car at his invoice and still have $300 $600 profit in the deal. Remember this when you are getting down to the final price.

Definitions:

• Total MSRP means that the holdback is based on the total sticker price of the car including options.
• Base MSRP means that the holdback is based on the sticker price of the car excluding options.
• Total INV means that the holdback is based on the dealer invoice price for the car including options.
• Base INV means that the holdback is based on the dealer invoice price for the car excluding options.

Holdback Chart

FACTORY INCENTIVES:

Factory incentives are usually given by a manufacturer to move excess inventory or to close out the previous year's models. When a manufacturer wants to move slow-selling stock, they will usually heavily advertise rebates directly from them. You should not figure this rebate into the deal you are making with the dealer until the very last step. It has nothing to do with his costs unless the advertisement states, "offer good at participating dealers only." In that case, the dealer may be paying part of the rebate. "Participating dealer's" rebates are not used too often. Year-end incentives (usually 5%) are given directly to the dealer by the manufacturer.

DEALER CHARGES:

Dealer charges are usually charges additional to the sticker price affixed to the car when it is received from the factory. Sometimes this is for added equipment, and sometimes the dealer has found a way to build up the price of the car (and therefore his trading margin).

A lot of dealers will charge "dealer prep" charges, added rustproofing, special interior or exterior protection treatments, extended warranty, or body side moldings. These are high markup extras, and you shouldn't buy them if you don't want them. "Dealer prep" charges are provided for by the manufacturer, and you should not have to pay for them. To figure out what you should pay for a given car, you must take into account:

• 1. Factory invoice
• 2. Destination charges
• 3. Dealer holdback
• 4. Factory incentives
• 5. Dealer charges

TARGET PRICING

We have compiled Target Prices: How much you should expect to pay because there is a need for consumers to understand what is a fair and reasonable deal in the marketplace. These prices are based on deals that have been reported to us for the makes and models listed.

As a general rule-of-thumb, if you can buy a car from $100-$300 over invoice (for the base car + accessories + destination charges), you have a good deal - so does the dealer. He has his holdback, and he has his amount over invoice. His profit is fair, and he'll be able to stay in business to service your new car. If there are factory incentives in effect, you should be able to get the full benefit of these incentives after buying the car at $100-$300 over cost. The "dealer charges" are another matter. Don't buy anything you don't want, and don't pay for something you already have coming. Beware of "supplemental" or dealer generated price stickers. They are usually for high markup items that you may not want or need.

Most people I know hate the experience of buying a new vehicle. Whether it is a car, truck or minivan, the experience can be a very harrowing one because most people don't go about it the right way. Since a new vehicle is a very expensive item, it is worth your while to invest some time and effort into getting the best deal you can. This article deals with how to buy the specific vehicle that you have already picked out. Our job is to make it easier for you to negotiate and to help you get the best deal possible.

There is one thing to remember when buying a car.

The average buyer is in the market once every five years, whereas the average salesman sells a car or truck every day or two.

WHO DO YOU THINK HAS THE ADVANTAGE?

It is possible to save more than $2000 on a new car or truck if you do your homework. The calculations we use apply to cars, trucks or minivans. As a buyer, it is important for you to focus on your objectives:

• 1. To buy the vehicle you want (not what someone wants to sell you),
• 2. To pay the price you want to pay (within reason),
• 3. To get a fair price for your trade-in,
• 4. To obtain financing at the lowest possible cost.

The new car salesman also has some objectives:

• 1. To sell a car or truck,
• 2. To make the biggest profit he can,
• 3. To "steal" your trade-in,
• 4. To sell "Dealer Installed Options,"
• 5. To make a profit on your financing package,
• 6. To sell credit life insurance,
• 7. To sell you an extended service warranty.

The easiest way for the dealer to achieve all of his objectives is for him to "package" all of the items he is trying to sell into one monthly payment. BEWARE - THIS IS NOT THE WAY TO BUY A CAR. I once had a friend who would say, "I'm like a kid with a new car - I don't care how much it costs - what's the payment?" Well, an extra $30 multiplied by 60 months is equal to $1800 of your hard-earned money. Follow our advice, and you will get the best possible deal.

DEALING

You, as buyer, are trying to consummate three transactions:

• 1. Buying a new vehicle,
• 2. Selling your old vehicle,
• 3. Obtaining financing for 2, 3, 4, or 5 years.

This is exactly how you should handle your transaction: three separate dealings.

BUYING YOUR NEW CAR, TRUCK OR VAN

By using the wholesale or "dealer's cost" prices from carprice.com, you will have the inside information on what your vehicle and all of its factory installed options cost the dealer. Simply add up the wholesale price, or INV., the destination charges, and every option listed on the sticker, and you'll have it.

To calculate the true dealer's cost, you must follow the aforementioned procedure and further deduct the holdback amount. You must then add the freight charges to the cost. Here is an example:

Now you know how much the car cost the dealer: $21,156. Assuming the dealer will keep his entire holdback, you now must decide how much you are willing to pay. Generally $100 to $300 over cost (total plus destination charges) should be a fair price, which in this case amounts to between $21,256 and $21,556.

GETTING A FAIR PRICE FOR YOUR TRADE-IN

How much is your old car or truck worth? Have you taken care of it? Did you bring it in for an appraisal clean and shiny, or was it dirty? The best and easiest cars to resell are those that show they have been taken care of. When you take your car in for an appraisal, be sure it looks its best.

Your dealer is going to "buy" your trade-in. That's the bottom line. Naturally, he wants to pay as little for it as he can. Ask if he is going to resell it on his lot or if he plans on wholesaling the car to another dealer. If he's wholesaling it, there are two middlemen's profits to be made, and you might not get enough in trade. This situation may necessitate a trip to another dealer who might give you more for your trade-in.

Do not expect to get the retail value of your vehicle when you trade in on a new one as we've outlined previously. The dealer is entitled to make a fair profit. Carprice.com offers accurate used car and truck prices that will make it easy to determine the approximate value of your trade-in. The amount you should get in trade is somewhere between the "average wholesale" and the "average retail" prices listed. The condition of your trade and market conditions for both new and used cars will determine whether or not you can make a deal, do not hesitate to negotiate. Dealers expect negotiation and are prepared for it. They leave bargaining room in the prices they quote for "negotiation movement." Quite often, dealers will pull out their "value guide" and show you a "market" price for your vehicle that is REALLY LOW. Generally, these guides are put out for dealers to use in just such a negotiation. I would be willing to buy almost any car, sight unseen, at these prices and so would your dealer. You can and should negotiate from these low prices.

If you are unsuccessful at negotiating a fair price for your trade-in, consider either trading elsewhere, wholesaling it yourself, or selling it privately through an ad in the paper.

FINANCING AT THE LOWEST POSSIBLE COST

Before you go shopping, make some phone calls. Find out what the going rates are, how much down payment is needed, what time terms are available, and anything else lenders might require. With this information, you can compare what the dealer is offering to what is being offered on the "street."

Arranging financing is a profit center for dealers. If you intend to finance your vehicle purchase, you'll have to get the money somewhere. There is no problem in getting it from your dealer as long as you don't have to pay more for financing than you would at a bank, credit union, or other lending institution.

BEWARE OF EXTRAS

There are so many aspects to dealing that it is hard to know what will pop up and when. Here are some tips:

Do not buy "dealer installed options" such as undercoating, fabric protection or special wax jobs. If you happen to want them, negotiate the price. These are very high mark-up items.

Do not pay "additional dealer markup." This is designed to give dealers more than normal profits on specific cars.

Do not pay "document handling charges." There should be no charge for this. The dealer cannot sell a car to anyone without doing the paperwork.

Do not pay "dealer preparation charges." The dealer is already paid for this by the factory.

Do not buy "credit life insurance." This is the most expensive form of insurance known to mankind. If the lender needs additional collateral, find out why and how much. If you're not satisfied, find another lender.

Do not buy an "extended warranty" unless you want it. Be sure to check the warranty that comes with the vehicle. It may be enough, especially if you keep the car for only two or three years.

If you want the extended warranty, be sure to find out exactly what it covers, what the deductible is, and whether it can be transferred over to a new owner.

If you study and apply the suggestions included in this article, you will be more prepared than 99% of the people who are out buying at this very moment. Getting the best deal is not difficult if you understand the transactions you are making and follow the guidelines we have explained.

Good luck and good negotiating!

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