What so many new car buyers don’t know is that the dealer invoice price is a lot higher than the new car dealers actual cost of buying a new car. There are hidden ways that car dealers generate profits, creating a wide gap between the price invoice and the true dealer cost.
When you request a free, no obligation to buy new car price quote you will learn the true dealer cost – and that isn’t the price invoice the dealer paid.
Now, let’s take a look at the various terms you’ll hear when looking for a new car and what they mean to you.
The new car dealer’s invoice is the amount the carmaker invoices the dealership for cars they buy, along with any options. Dealerships can technically claim this is the amount they paid for the new car you’re interested in. This invoice prices doesn’t include various fees that differ from dealership to dealership.
The factory invoice is the entire cost to the dealership; the base invoice price, along with any options, destination charges and specific manufacturer fees. However, what no one will tell you is that this amount does not specifically address factory incentives automakers offer new car dealerships to further advance sales.
The MSRP (Manufacturer’s Suggested Retail Price) really needs no explanation; the name says it all and it isn’t etched in stone. It is a suggested starting price and new car dealerships can actually charge whatever they want on a new car.
Obviously, new car dealerships must have cars in stock for you and other new car buyers to choose from, in order to generate a sale. Automakers don’t just give those cars to the dealership; the new car dealer has to pay the manufacturer upfront for each new car on the showroom floor. The amount the dealership pays is the price invoice shown from the automaker to the dealership; the supposed invoice price.
But is everything really this clear-cut? Sadly no; most automakers inflate the price invoice shown by anywhere from two to three percent of the MSRP or factory invoice price. Then the kicker: Down the road, normally quarterly, the manufacturer returns that percentage to the dealership. It’s called a holdback because the automaker held it back only to release it after the car was invoiced.
So why would they go to all of this trouble over money that’s returned to the car dealership? Here’s why:
It stands to reason that new car dealerships have to borrow money to buy new cars. It also stands to reason that the amount they borrow is based on the price invoice shown, which includes the dealer holdback. The higher the invoice price, the more money they can borrow.
The holdback also increases the car dealer’s profits, as their salespeople are compensated on a commission basis for making sales. These commissions are calculated on gross profit and since the holdbacks lower the gross profits, it also lowers the payable commissions.
This is how all of these new car dealers are able to run marketing campaigns offering “to sell you a car at or near dealer invoice price”, making it sound like they’re sacrificing big profits – when in reality they’re making hundreds, possibly thousands of dollars in profit on each transaction.
And that’s not all: They generate even more profit off of you when dealer cash is being offered by the automaker on the new car you’re buying. This is another reason why it’s important that you do your homework first by requesting your new car price quote: to gain access to the new car dealers true cost on the new cars you’re interested in evaluating.
Generally speaking the market averages determine the differences between good car prices and exceptional ones. A certain percentage of sales transactions falling slightly above the market average would be considered a good price, with lower than market averages representing a great price for a new car.
A lot of factors weigh into a new car price being ‘great’ such as the supply and demand. The market average essentially represents the higher concentrations of sales prices.
In your quest to become informed of the various aspects of buying a new car, along with the terminology used, there is one tactic you may not have run across yet: The Dealer Four Square.
What car salespeople do is take a sheet and literally mark out 4 squares, covering car payments to the value of a trade-in. This allows them to see the overall profit the car dealership will generate, as well as easily see every part of the transaction. Here is exactly what the four parts contain:
The car’s purchase price and what the dealership is asking for the vehicle. Oftentimes they will jot down a base price then add ‘plus fees’. What this means is that additional costs such as licensing fees and sales taxes will need to be paid by the new car buyer.
The car dealership gives you credit for a trade-in and the amount of the trade-in is applied towards the new car. Normally dealerships would like for you to put down around 1/3 of the purchase price of your new car; however, it can vary from dealership to dealership.
In another section the car salesperson will put the down payment you’re making in cash (or via credit card).
Finally comes your monthly car payment and the salesperson will put the amount you indicate is the maximum amount you’re willing to pay. Pay attention, because this amount is the number the salespeople will attempt to focus on since it plays a big role in your monthly budget. Plus it just sounds better to have a new car buyer look at a much smaller amount versus what they’ll be paying in the long haul.
All of these sections are related to the other and because of that fact, any changes made to one ‘square’ can be adjusted for in another square. Let’s say for example you need for them to give you more of a trade in allowance – don’t fall over when the salesperson readily agrees; they’ll simply increase another square so they get what they want and you think you negotiated the deal of a lifetime.
So how can you beat them at their own game?
The best way is to not let them make your new car transaction so complicated. Why not sell your car on your own instead of using it as a trade in and/or talk to your bank about financing the new car through them? Both of these examples takes a big part of the Four Square game off the table and simplifies the process.
You’ll get a much better deal when you refuse to play their game and make them play yours.
Another way to beat them at their own game is to do exactly what you’re doing now; your homework. Reading this informative article is critical to becoming an informed buyer; request a free car price quote so you can use another dealerships offer to negotiate an even better deal for the car you want.
Leave the dealership holding nothing but a pair of twos, while you have a full house. Request your free new car price quote and let the games begin.