Smart Buying Essentials

What Price Should You Pay?

Wouldn't it be a relief if new-car prices were no more negotiable than a can of tuna at the supermarket? Unfortunately, that's not the nature of the game.

And in many ways it is a game. Unless you've been trained, don't expect to beat the dealer - he or she is a pro, after all. But if you do a little homework, you can arrive at a fair deal for both yourself and the dealer.

Dealer Incentives

The "dealer cost" figures shown in this book are known in the trade as the "dealer invoice" prices. But in reality, dealers usually purchase a car for less than dealer invoice. This is because automakers frequently provide so-called "dealer incentives."

All domestic automakers and some foreign automakers give their dealers a "holdback," or a refund of 1 to 3% of the invoice price after the car is sold. Automakers often give "factory-to-dealer" rebates as well. The dealers can either keep the rebates or pass them along to the customer to sweeten a deal. These and other dealer incentives explain why a dealer can sell a car at "cost" and still make a profit.

Knowing the dealer's true cost for a car - that is, the invoice price minus holdbacks and factory-to-dealer rebates does not automatically guarantee that you will get the deal of the century. But, it is an effective weapon to have as part of your negotiating arsenal. Not only will it give you a good indication of how much profit a dealer is trying to make on each sale, but it will also serve as an excellent point from which to begin negotiating.

Customer Incentives

Cash-back rebates have become as much a part of the new-car sales routine as tire-kicking and test drives. And they're not "funny money." Cash-back rebates, as well as zero-percent or deeply discounted loans and subsidized leases, are free money from the automakers, money you'd otherwise have to pay for a new car or truck.

However, automakers use incentives to reduce inventories, and you're not likely to find fat rebates on the Mazda RX-8, Nissan Titan, Subaru WRX STi, or other vehicles creating a marketplace buzz.

Here are the usual consumer incentives:

√ Factory-to-customer rebates: Cash rebates are manna from the automaker, not the dealer. A factory-to-customer rebate is a sort of price cut, but one that comes in addition to any price cut you negotiate with the dealer. A rebate doesn't change the price the dealer pays for the vehicle. So don't be afraid to dicker even on vehicles with hefty factory-to-customer rebates.

In theory, after you buy the car or truck, the manufacturer mails you a rebate check. The dealer never need touch the money. In practice, most buyers use the rebate as part of their down payment and never see the cash, electing instead to turn it over to the dealer. Indeed, it's possible to buy a new car or truck with no cash out of your pocket if the factory rebate is big enough.

√ Discounted loans. Zero-percent or deeply discounted loans can save buyers thousands of dollars over the lives of the loans. Truly, free money for those who meet the stringent qualifications.

But discounted loans are often offered in lieu of a rebate. And which should you choose if you're offered a choice between a cash rebate or cheap financing? It's a moot point for many buyers who need the rebate to help make the down payment. But if you have enough cash for the down stroke, you'll often be ahead by taking the loan.

√ Subsidized Leases. Each month, IntelliChoice lists the best sub-vented leases on its Web site, IntelliChoice.com. With a sub-vented lease, the manufacturer is effectively increasing the automobile's residual value for payment calculations.

Dealer "Packs"

Every car on a dealer's lot will have a window sticker showing the manufacturer's suggested retail price. (This sticker is known as a Monroney sticker in the trade.) But a dealer will often add a second window sticker. This can be a gold mine of added profit for a dealer. The sticker may include charges for worthwhile dealer-installed options - an alarm system perhaps. But it may also include goodies such as documentation fees, dealer preparation charges and, most blatant of all, "market value adjustments" (MVA) or "added dealer profit" (ADP).

These extra charges - except for the dealer-installed options that you want on the car, and a reasonable destination charge that covers the manufacturer's cost of delivering the vehicle to the dealer - are profit padders, and you should not have to pay them unless the car is in great demand.

Dealer Advertising Fees

As stated on the previous page, the dealer's cost on a vehicle may be lower than the figure published on this CD since manufacturers often offer hidden incentives to dealers known as "dealer holdbacks." These discrete incentives are paid to the dealer by the manufacturer, rewarding the sale with typically 1-3% of either the base MSRP or total MSRP. Simply put, with the exception of a half dozen luxury marques, the dealers can still make hundreds or more on a sale, even if the transaction price is just a $1 over their invoice price...

On the other hand, the dealer cost may actually be higher than the figure in this CD because some dealers are required to pay an advertising fee for each vehicle they sell. This fee is charged by the manufacturer and is used to promote the brand in the dealer's geographic area.

The dealer will tell you that he must sell the vehicle at a price that covers his advertising fees. This is a legitimate fee, but you shouldn't hesitate to ask the salesperson to show you his invoice for the vehicle. If he has been straightforward, he should have no problem unveiling his cost to you. If you do have a chance to see the invoice, you may find it somewhat complicated, but the dealer advertising fee should appear on the invoice. If it isn't clear, ask the salesperson to point it out for you.

Make sure you question any charge you do not understand. And always remember to find out if there is a dealer holdback on the vehicle. (This should also appear on the invoice.) If the dealer insists that you cover the cost of his advertising fee, you should make sure that he deducts any holdback offered by the manufacturer. In fact if there is a holdback, it usually more than offsets the advertising fee.

Ultimately, your goal should be to find out what the bottom line cost is to the dealer and try to aggressively negotiate the best deal you can.

Supply and Demand

Keep in mind that a dealer can charge any price the market will bear for a car. In most cases, the "target prices" given in this book will be enough to give the dealer a fair profit and you a fair price.

However, if a car is in great demand and short supply, the dealer may refuse to sell the car for anything less than the manufacturer's retail price. Indeed, if the car is in very great demand, the dealer may even insist on a markup over the MSRP. In this instance, check with dealers outside your local market who may have a better supply of the cars.

By the same token, it will be easier to negotiate a better deal on overstocked cars or models that are not selling well. Dealers who are carrying less popular models that have been sitting on their lots for a long time are stuck with a double-edged liability. Not only are they losing profit on potential sales, but they are paying finance charges and other expenses while they keep the cars. They may be happy to get them off the lot at a bargain price.

No Dicker Stickers

Take-it-or-leave-it price tags have suddenly become all the rage in the auto industry. A handful of enlightened individual dealers across the country, as well as all the dealers of one automaker, have decided to face head-on the traditional notion that the new-car showroom should take on the atmosphere of a third-world bazaar.

General Motors' newest division, Saturn Corporation, took the lead in eliminating the haggling over a car's price at its dealerships.

Individual dealers for other automakers, after noting Saturn's success, are also trying no-haggle policies. And surveys have shown that most customers love it.

Instead of boosting the window sticker prices by thousands with the expectation of knocking them down during the grueling negotiating process, the dealers tack on a reasonable profit to the invoice price and refuse to bargain down the price with the customer.

Though no-dicker-stickers eliminate part of the new-car-shopping hassle, they are not however, a panacea for haggle-phobic customers. Even no-dicker-sticker dealers have other ways to line their pockets with your money. In fact, studies have shown the consumers typically pay more for a no-dicker deal than a negotiated one, though the shoppers are more satisfied with the experience.

Buyers who wish to trade in their old car to the dealer must still negotiate a price for their trade-in.

Dealer "F&I" (finance and insurance) managers can still pad dealer-provided loan or lease agreements with high or unnecessary extra charges if you let your guard down. (see Closing the Deal: Surviving the F&I Office).

And because dealer overhead can vary depending upon a dealer's location, the no-dicker prices will vary. Car buyers still need to shop around for the best price, even among one-price dealerships.

Worst of all, some dealerships purport to have no-dicker-stickers - but will actually negotiate if you press them. This of course, means their one-price policy is a sham. Finally, if you really think you can beat the dealer at his own game (few people can), if you enjoy a good haggle, and if you have the time and patience to try, there's still no substitute for hard, astute bargaining at a traditional dealer.

The Bottom Line

So what price should you pay? Realistically, you should set your goal to purchase the new car at the "target price" listed in the vehicle charts starting on page 1, minus any current factory-to-customer rebate if one is available. The target price is calculated using the dealer invoice as a base, and factoring in market conditions to arrive at a price that represents a good deal to you and a fair profit for the dealer.