Buying a new car is oftentimes like playing a shell game – one price is under a cup and it gets shuffled around so many times you don’t know what’s what. Let us help you take the mystery out of new car pricing, so you know a real deal from a sleight of hand.
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What is MSRP and How Does it Relate To The Dealer Invoice Price?
The same as with any other retail business, the car manufacturers suggested retail price (MSRP) is a starting point for dealerships to sell their new cars. Keep in mind it is simply a suggestion and the dealership can sell the car at whatever price they want. The dealer invoice price is almost always lower than the MSRP.
Here’s how it works: The invoice price is the retail price that’s been inflated over what the dealership actually paid for the car, along with the addition of destination charges and any factory installed options. The invoice price is not the best a dealership can do, even if they sell below it they are still making a profit.
If The Dealer Invoice Price Isn’t The True Dealer Cost, How Do You Know What The Dealer Paid?
There are many hidden factors that substantially reduce the dealerships real cost of a new car. The first is what we touched on above, regarding inflated invoice prices. This refers to what’s known in the industry as the “dealer holdback” and it’s an amount equal to 2 to 3 percent of the MSRP or factory/dealer invoice price.
Just as the term implies, this amount is held back by the manufacturer and then returned to the dealership at an agreed upon time (normally quarterly). You may be asking yourself, why the fuzzy math? Well, first of all the car dealer has to pay for their inventory upfront which requires financing; the higher invoice price means a larger credit line through the bank.
The holdback also increases the dealership’s profit margin on every new car they sell. Your salesperson gets paid commissions on the gross profit of the car sale and the holdback reduces that; meaning the dealership pays them less in commissions.
The other benefit is this allows them to advertise a car ‘at invoice price’, which sounds to the uninformed buyer like they’re willing to sell the car at no profit. Right – a car dealer who is so generous they will sell you a car and not make a profit? Don’t forget that if it sounds too good to be true, it is.
Use The Dealer Holdback Help Negotiate A Fair Price On A New Car
Car dealers will never willingly part with their holdback, but being aware they exist means you have leverage during negotiations. You won’t have the wool pulled over your eyes when a car salesperson says they won’t make any money selling a car at invoice price. They make money and believe you me, lots of it and here’s how:
Another huge source of profits for car dealerships is through little known incentives they receive from automakers. There are end of the month bonuses, end of the year sales bonuses, special regional bonuses; amounting to a lot of money from each car they sell.
When you factor in the dealer holdback, along with these bonuses and factory to dealer incentives you’ll have a much better idea of the true dealer cost, along with the amount of wiggle room they have to negotiate the purchase price.
So if a dealer won’t offer to share some of these profits with you, call their bluff and tell them you’ll simply go down the street to another dealership you’ve been speaking with. Do your homework first and have online price quotes from all of the new car dealerships in your area so you can leverage them against each other to get the best deal.
When Are Car Dealerships The Most Anxious To Sell Cars, So You Get A Better Deal?
When you are aware of the various times during a sales year when new car dealerships must generate sales, you’ll be in an even better position to negotiate a great deal on a new car. Let’s explore some of these instances:
- End of month incentives: One of the many bonuses that dealerships and salespeople get are bonuses for hitting certain monthly sales goals set by the manufacturer. If they sell X cars, they get X dollars. When you go to a dealership the last few days of a month when they’re frantically trying to get bonus money, you’ll find them very receptive to lower offers. Don’t forget, they’ve already inflated the invoice price and now they’re going for the gold in bonus money.
- Save big on a Saturday: Dealerships know that most people like to spend Sundays with family, so Saturday is a big shopping day. The first day off from work and it doesn’t interfere with church or other activities reserved for Sunday. They also know that every other dealership in town is aware of this fact and that you can just as well go to one of their competitors to buy your new car. Therefore they are willing to cut to the chase and give discounts to grab your business.
- Happy Holidays! Yes, December and other holiday times are huge for saving on a new car. You and everyone else is busy wrapping presents or getting ready for the big New Year’s Eve party. The end of the year is upon us and car dealers have to move inventory to make way for new models that are in transit. Dealerships are ghost towns and when a new customer shows up they will be greeted like a King. Use everything you’ve learned reading this article and hit them when they’re most vulnerable.
Get on your way to securing a real deal on a new car and request your free, no obligation price quote from top competing new car dealerships .
Have the true dealer cost, along with current rebates and incentives to negotiate in confidence for the best possible deal on your new car. Turn the tables on new car dealerships and drive away with a real deal.