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How to Understand New Car Pricing

June 07, 2012

Talking about new car pricing is like watching a movie in a foreign language. It is confusing to say the least, and car prices can rise or fall depending on yet another confusing set of factors such as market demand, regional incentives, etc.

You don't need to have a degree in economics in order to understand new car pricing. You can do this by simply knowing the meaning of various car pricing terminology, such as:

1. Sticker Price

See that sticker or piece of paper posted on the window or windshield of each new car on the showroom? That is called the sticker price, or what is also called the Manufacturer's Suggested Retail Price (MSRP).

The sticker price is ideally the price that you need to pay in order to enjoy the privilege of driving the automobile. Car dealers can add hundreds to thousands of dollars on the sticker price without you even knowing it.

The sticker price will indicate the base price of the automobile, the destination charges, the trim level of the vehicle, and other information such as vehicle make and model, body color, and engine/drive train configuration.

2. Factory Invoice

The factory invoice is the wholesale price of the car, or the actual price that the dealership paid the factory. Depending on the make and model of the vehicle, the factory invoice can be lower by a few hundred to several thousands of dollars compared to the sticker price. If you buy the vehicle at factory invoice, you are getting yourself a good deal. Of course, you can do better.

3. Holdback

The holdback, holdback allowance, or dealer holdback is called many things, but it is actually a form of selling incentive given by the manufacturer. Again, the amount of holdback will depend on the make and model of the vehicle, but it is estimated to be 3% of the vehicle MSRP or factory invoice.

Remember when we said that you can do better than buying a vehicle using the factory invoice price? The holdback amount will be 'held back' or given back to the dealership after selling the vehicle. Since the dealership will get it back, it is only fair that the holdback should be deducted from the factory invoice.

For a car costing $25,000 the holdback can easily reach $750. If you were aware of this, then consider yourself lucky to save $750 on the car that you want. If you further negotiate the factory invoice, you can save more than that. Deducting the holdback is the simple way to pay below the factory invoice.

We will talk more about new car prices in the next couple of posts. Remember that by simply knowing a few important terminologies, you can quickly get an idea on what new car pricing is all about.

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