Did you know that EVERY New Car has a 'Secret Price'?
Secret #1: Consumer Incentives
Money Saving Tips
For Car Buyers: First, do your homework. Learn all you can about dealer tricks because they can quickly erase any discounts or other savings that you think you're getting. Car dealers spend millions of dollars training their salespeople to get more money out of customers, and if you don't know the tricks they use, you could be overcharged by thousands of dollars. Find out the dealer's real cost on the car (it's typically less than invoice) and the prices that smart shoppers are paying for that car, then research any other items you might want (loans, extended warranties, car alarms, etc.). Shop around for competitive auto loan (or lease) rates at banks, credit unions and lenders on the Web. When you find a great interest rate, get pre-approved at that lender before you start negotiating with dealers. If a dealer can beat the rate you found, let him finance the car -- on a "simple interest" contract only. Otherwise, stick with your pre-approved loan.
When your homework is done and you're ready to buy, you start the negotiating process -- where dealers quote prices and you make counter-offers. If you've done your homework properly, this process should result in less haggling -- and lower prices. To make dealers compete (and drive the price down), use the Internet to get at least 6 price quotes before you start negotiating with any dealers. When you get to the contract stage, make sure the dealer doesn't slip any hidden charges into your loan or lease. (This is known as "payment packing.") To avoid this common rip-off, calculate your own monthly payments first. Finally, always negotiate the price of the car, not the monthly payment.
Car Price Secrets
What Dealers Won't Tell You About Car Prices
In order to understand what price you might expect to pay for your next car, you must first understand how new car pricing really works. As you know, pricing is very important whether you lease or buy.
Different customers can pay widely different prices — for the same car, at the same dealer, on the same day — depending on each customer's knowledge of how car pricing works.
New car dealers expect most customers to negotiate price. Unfortunately, negotiating is not easy. Buying a new car is more like haggling for a donkey in Marrakech than buying a refrigerator at Sears. Dealers are able to quickly spot customers who don't have the knowledge to negotiate well. Knowledge is key.
Let's take a look at how dealer pricing works.
Manufacturer's
Suggested Retail Price
First, for new cars, automobile manufacturers decide the retail price
that will be set on each model, each model variation ("trim"),
and each option. Combined, these prices become the Manufacturer's
Suggested Retail Price (MSRP). These prices can change from year
to year for the same models, or can even change one or more times during
a model year.
This price becomes the "sticker price" — the price shown on the vehicle's attached window sticker. There will also be additional charges for transport and preparation ("destination charge"), and distributor/dealer installed options. These charges are not technically part of the MSRP, but are part of what you pay.
Notice that the "S" in MSRP is short for "suggested," meaning that a vehicle's sticker price in only a recommended price. A dealer is perfectly free to charge more or less if he chooses.For hot new vehicles in high demand, selling prices can easily be higher than sticker price. For slow selling vehicles with excessive inventories, selling prices will almost always be less than sticker price.
Invoice Price
Dealers are independent businesses, not owned by car makers, which means
they buy wholesale and sell retail to make money. Sometimes called "factory
invoice price" or "dealer invoice price," this is the price
that a dealer pays the manufacturer for a vehicle. All dealers pay the
same price for the same vehicle. However, there are other factors that
determine a vehicle's final cost to a dealer. We'll examine those in a
moment.
The difference between sticker price and invoice price is a dealer's potential profit margin, assuming vehicles sell at sticker price — ignoring other costs or any rebates he might receive. This dollar margin, as a percentage of sticker price, is not the same on all vehicles. Some vehicles have a very low profit margin percentage, others have a high margin percentage. A vehicle with a high potential profit margin provides an opportunity for a higher dollar discount than a similarly priced vehicle with a lower profit margin. (The Lease Kit provides a chart that compares profit margins for all vehicle makes and models)
Invoice price alone, however, does not tell the entire story of what a vehicle costs a dealer. He has other costs and other sources of profit.
Dealer Costs
Dealers usually have to pay national or regional group advertising fees
(for TV and newspaper ads) and interest on loans ("floorplanning")
used to buy vehicles from the manufacturer. They also have the typical
costs of running a business: employee salaries, rent, utilities, taxes,
etc. Many customers mistakenly believe that dealers should be able to
routinely sell cars at their base cost. If they did, they would soon be
out of business. Any business must make a profit to survive.
Factory Assistance
to Dealers
Dealers receive special fees, bonuses, and rebates from manufacturers
that reduce costs and add to profit potential. Without manufacturers'
assistance, many dealers wouldn't be able to make it. "Holdback"
is an example of a common type of bonus received by dealers.
Holdback is a kind of rebate from the car maker that is usually a small percentage (typically 1%-2%) of a vehicle's MSRP or invoice price that a dealer receives only after a vehicle is sold. Technically, this is compensation for finance fees the dealer incurs while vehicles sit unsold. The faster a vehicle sells, the more profit he makes on the holdback. A vehicle that sits on the lot for a long time can be a money loser, even with the holdback.
There might also be promotional factory-to-dealer rebates or bonuses based on certain conditions or sales goals being met. Factory rebates can often be significant in times of slow sales. Dealers can choose to pass some or all of his factory rebates along to customers, or not. These rebates are especially common at the end of the model year. In most cases, heavily advertised discounts have a "factory contribution" as well as a "dealer contribution." This means both the manufacturer and the dealer give up some (or most) of their potential profit to help promote sales.
Holdbacks, factory rebates, and bonuses are what allows dealers to sometime sell cars for less than invoice price.
Selling Price
- "Cash" Price
This is the price that customers actually pay for a vehicle, which is
usually somewhere between MSRP and dealer invoice price. Again, there
are conditions under which selling prices could be higher than MSRP or
lower than invoice price depending on supply and demand, and promotional
incentives.
Selling prices can vary considerably for a particular vehicle make and model, depending on the dealer, area of the country, city size, competition, time of month, time of year, negotiating skills of the buyer, and available incentives. With all these factors at play, it's easy to understand the wide range of prices that consumers pay for a particular vehicle.
Price Discounting
There are two parties to new-car price discounting — dealer and
manufacturer. Manufacturers provide factory-to-customer cash
rebates and factory-to-dealer rebates. A dealer can provide additional
discount ("contribution" or "participation") by giving
up some of his own normal profit, or some/all of his factory rebate, if
any.
Customers sometimes overlook the possibility of a negotiated dealer discount when they are already getting a factory-to-customer rebate. Dealers often encourage this misunderstanding. The combination of strong dealer discounts and aggressive manufacturer incentives can easily result in below-invoice selling prices.
What Are Others
Paying?
Ideally, we should be able to determine what other customers are paying
for the same vehicle make and model that interests us. However, this is
virtually impossible since dealers are not obligated to publicly report
selling prices. Although Edmunds.com
posts a True Market Value (TMV) price for each vehicle make and
model that purports to be a representative average selling price, these
are based on limited information and not always accurate.
Many vehicle makes and models have owner-enthusiast web sites in which users willing share prices they've paid. Although this can be helpful, it doesn't provide an accurate picture that represents all dealers, in all cities, under all conditions. Price patterns can vary greatly across the country.
How to Get
Prices
One of the best ways to get an accurate feel for dealer selling prices
in your town is to request free quotes from online pricing/buying
services that partner with dealers across the country to provide
Internet customers with good prices.
You should understand that these Internet-based companies are not car dealers. State laws dictate that all new-car sales must be transacted by a licensed franchised dealer. CarsDirect (below) comes closest to actually selling cars online because they can handle all the details themselves (for most zip code areas) up to the point at which customers must go to a local dealer to pick up their vehicle. It's a great service for those who don't have the time or interest in haggling with dealers.
Participating dealers typically agree with the online service to offer the services' customers prices that are a percentage or dollar amount over invoice price (or under invoice if manufacturer incentives are available). In return, the dealers pay the services a small fee for the referral. The service is free to potential customers.
