How to Buy a New Car

New Car Buying Tips

Understanding New Car Pricing

Remember – as soon as you walk into a dealership you will be eyed-up and every person who works there is going to do everything they can to take every last nickel they can get from you. Knowledge of how new car pricing works is key to getting the best deal. This understanding will arm you with the insight you need so you’re prepared before you start shopping for a new car.

First, find out the MSRP, Invoice Price and the Actual Price of the Car you Desire

MSRP – Manufacturer’s Suggested Retail Price

The price at which the manufacturer recommends selling the car. This is for a “base” car – not including options or additional accessories. Nor does it include delivery or destination charges (the cost of shipping the vehicle from the plant where it was built to the dealer's lot, typically about $400). The MSRP helps to standardize prices within locations. But that doesn’t mean the dealership will use that price. Normally they try to sell it for more.

Sticker Price

The sticker price is the price of a vehicle as advertised by a particular dealer — what they want you to pay. It often includes a considerable markup over the MSRP. Dealers are willing to reduce the sticker price in order to complete a sale. However, to make up for the lowered price, they will often try to get you to buy add-ons such as undercoating, alarm systems, window tinting, striping or chrome wheels. These extras are often over-priced.

The sticker price does not include taxes, title fees, or registration.

Invoice Price

That's the initial price the manufacturer charged the dealer for the car (the wholesale price). Buyers are often advised to use that number as a starting point for price negotiations. But most new cars can typically be bought below the dealer’s invoice price.

Do your homework. Today, invoice prices are no longer top secret. They are readily accessible online from numerous auto-related Web sites. However the information is not as valuable as consumers might think. For most purchases, the invoice price is far from the last word on how much the dealer actually paid for a given car. In fact, your knowledge of the invoice price could work against you if you are not aware of the other incentives by which dealers can end up paying less than the publicly available invoice price.

For example:

Holdbacks:

Dealers often get money back from the manufacturer after the car is sold. A holdback is compensation paid to the dealer for advertising and other expenses and usually amounts to a few percentage points of the invoice price, or a few hundred dollars. Holdbacks vary dealer to dealer.

What to do:  Subtract about 2% from the invoice price.

Factory to Dealer Cash:

This is essentially a rebate to the dealer. Anywhere from $300 - $2,000 per car can be given back to the dealer to sell slow selling cars. The more expensive the car, the higher the rebate. This type of incentive is applied to specific model cars. Manufacturers do not always make this factory rebate known to the public and the dealership is not required to pass along the savings to you.

What to do:  Ask the dealership about the quantity on the lot of the car you desire. If there are over 30 cars similar to the ones you are seeking and these cars have been sitting on the lot for over 25 days, there may be manufacturer incentives that drive down their actual cost. Factor this in the price.

Volume Incentives:

The dealers can get a financial reward if they sell a certain number of cars in a given month or quarter. The only problem with this is that unless you are buying at the end of the month or quarter, the dealer doesn’t know if he will meet that goal, so he won’t pass on that savings.

What to do:  Depending on the timing of your purchase, subtract a few hundred dollars from the invoice price.

Carry Over Allowances:

At the end of the year, dealers can get as much as 5% back to move year-end inventory from their lots. Take a look to see if next year’s models are out on the lot.

What to do:  If this factor is true, further reduce the invoice price by 3% - 5%.

The bottom line is:

Invoice Price - Factory to Dealer Incentives - Factory Holdback = Dealer’s Actual Cost

At the end of a car negotiation, a dealer is willing to part with the car for a typical profit margin of 3% - 5% (around $1,600 to $2,400 or higher).

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