A car does not simply cost what the sticker price says. On the contrary, negotiating the price you will ultimately pay is a crucial part of buying any new vehicle.
To be an effective bargainer, you first have to do your homework. The worst thing you can do is enter into to talks with the dealer's sales reps without having done some research - an unprepared buyer will undoubtedly get taken advantage of.
There are four basic terms you need to have a handle on when looking at the cost of a car. Understanding each will help you determine a fair price.
Let's take a closer at each.
Invoice price
The simplest of the terms, the invoice price is the wholesale price the dealer paid the manufacturer for the car, before rebates and incentives. In your research, you should be able to find out exactly what the dealers have paid for the model you are looking at. This is often a different number than what they claim is the invoice price, so it is important that you have your information straight going into the deal. You may even want to have a print out of the invoice price you found that includes the source as a back up. This will show the dealer that you mean business.
HerTip: The Internet is a terrific place to do your research. There are a growing number of sites that cover all of the important aspects of buying a car from pricing information to makes and models, availability and more. We will go over the key sites you should visit later in class.
Manufacturer's Suggested Retail Price (MSRP)
The MSRP, or manufacturer's suggested retail price, is the price the dealership is asking on the vehicle. It is also known as the "sticker" price, since it appears on a sticker on one of the car's windows.
Although the dealer will encourage you otherwise, the MSRP is not necessarily the price you should pay for the vehicle either. In fact, in your negotiations, it is a good idea to stray away from the MSRP and make an offer based on the true invoice price of the car that you found in your research instead. Again, researching prices on the web and arriving armed with a printout of the price you want will help you get the best deal.
Dealer incentives
For undersold cars that are building up large surpluses, the car corporations may attach special incentives in the form of cash bonuses paid upon each sale. These are called "dealer incentives." Be sure to ask if there are any attached to the vehicle you are looking at and subtract that amount from the price you are willing to pay.
Holdback
Holdback is the money the manufacturer pays to the dealer to help reduce their overhead, or the cost of running their dealership. It typically runs from 2 percent to 3 percent of the MSRP.
For example, a Subaru Outback that has an invoice price of $20,408 and a list price of $22,495 might have an approximate holdback price of $450 added on top.
Additional costs
Unfortunately, that's not all that goes into the cost of the car. There are other added costs that cover things like auto insurance, repairs, gas, parking, sales tax (5-8 percent of the purchase price), and state registration.
HerTip: A warranty on a new car typically covers any major repairs on the car for the first three years or so. It will not, however, cover routine maintenance like oil changes, and replacement for things like tires and windshield wipers. Depending on the car, warranties will last anywhere from one to five years.
What should you pay?
Now that you know all of the terminology, what should you pay? As with all negotiations of this kind, there is no hard and fast rule. But, as a general guideline, you should try to offer somewhere around $200 above the dealer's price of the car (including holdback and incentives).
Lastly, once your deal has been struck and it comes time to fill out the paperwork, pay close attention to all of the add-ons the dealer suggests. In most cases, these are simply extras, and they will undermine all of the hard work you have done to arrive at the price you wanted in the first place. Here are some that you should watch out for:
- Destination charges
- Licensing and registration fees - Call the DMV (division of motor vehicles) in the state where you live to verify the correct amount.
- Extended warranties - A really unnecessary charge. Just buy a car with a good service history and you needn't worry about this.
- Dealer prep - The dealer is already being paid to get your car ready for sale - that's part of his or her job. Don't pay them for it twice.
- Credit insurance - This insurance will pay off your car loan should you die while leasing it. As long as you have life insurance, this also is unnecessary.
HerTip: Shopping for your car later in the month may help you get a better deal. For starters, many leasing and rebate programs are based on the dealers making monthly volume sales. What's more, if the dealers don't have the cars sold and off of the lot by the end of the month they may have to pay financing charges.
Continue to: Part IV: Buy vs. Lease
Determining how much car you can afford