The key to getting the best deal is to understand where dealerships reap their profits and where they serve as middlemen. A car dealer’s main sources of profit, in no particular order, are: the new vehicle’s purchase price; trade-ins and resulting used-car sales; financing and insurance; “back-end” products and services, such as rustproofing and service contracts; and vehicle service (repair and maintenance).
On this page, we’ll deal with the first two of those factors: the new car’s purchase price and your old car’s trade-in value.
The price you pay for a new car hinges on a number of variables. They include but aren’t limited to:
- Invoice price
- Dealer holdback
- Customer incentives
- Factory-to-dealer incentives
- Supply and demand
- Your car’s trade-in value (in some states)
For most vehicle makes, the published invoice price is not the true dealer cost because of dealer holdback. Holdback is a portion of a car’s sales price (typically 2 percent to 3 percent of either the invoice price or MSRP) that an automaker returns to a dealer, usually on a quarterly basis. It’s a way of boosting the dealer’s cash flow and helps the dealer keep his lights on. Most dealers see holdback as something that they’re entitled to. In a general sense, everything is negotiable, but this is one item on which dealers seldom budge. And we mean seldom. If a dealer claims he wouldn’t make any money on the deal you propose, you may be able to use your knowledge of dealer holdback to call his bluff.
Most car shoppers are aware of customer incentives – cash-back rebates and, usually, low-interest financing as an alternative. Lesser known are the factory-to-dealer incentives that reduce the dealer’s true cost to buy the vehicle from the factory.
Supply and demand is another factor that’s difficult to predetermine. The latest, hottest model will sell at a higher percentage over dealer cost – and possibly over sticker price – than the model that’s been around awhile and is in steady supply. But you must realize this isn’t just about models; it’s about trim levels, colors and equipment, too. If you want a color or feature that’s in short supply, you’ll pay more.
Bear in mind that supply varies from dealer to dealer. A dealer’s allocation is based on previous years’ sales. If he sold relatively few copies of a given model last year, then he’ll get relatively few this year. If the dealer’s supply is short, even if the market’s isn’t, then he’ll probably want more money for it. If he doesn’t have the model (or trim level or feature) you want and his allocation is used up, then he may be able to trade for or buy one from another dealership.
Your current car’s trade-in value can be used to lower the effective purchase price. Some states tax only the negotiated price minus the trade-in value, which results in a lower taxable amount and considerable savings for the buyer. Others tax the full negotiated price. If you’re not sure which applies to you, ask the dealer – they’re certain to know and should have no problem providing this information.
Whatever the variable, it’s important to shop around. By shopping multiple dealerships during an incentives period, you’re more likely to get a better deal.
Additionally, don’t forget to factor in these costs:
- Destination charge: This is a non-negotiable fee set by the manufacturer that covers the cost of shipping the vehicle to the dealership (this charge is itemized in model reports within our Research channel). It’s a fixed number, whether your dealer is 1 mile or a whole continent away from the factory. It may be called a “delivery charge,” but under no circumstances should you pay a destination charge and a separate delivery charge that a dealer tacks on. One charge is required; the other is padding.
- Taxes: You can’t avoid these, and they represent a good chunk of change on a purchase this big. As mentioned, the value of a trade-in in some states gets subtracted from the negotiated purchase price, which lowers the tax burden. Other states tax the unadjusted transaction price.
- License and title fees: The method and cost varies from state to state, but these fees are unavoidable.
- Insurance: Insurance is another unavoidable expense that adds up. Don’t leave it out of your affordability calculations.
The car you currently own probably represents profit. The question is, whose profit will it be? With few exceptions, you’ll get the most money for your used car by selling it privately. That’s because dealers pay wholesale prices – not retail prices – for used cars. They sell them at retail, and the difference between the two is the only reason they bother. A used car’s profit margin, though based on a lower selling price, is much greater than that of a new car. Don’t underestimate your car’s value to a dealer.
If you don’t want to make the effort or take the time, there’s an in-between option that might add considerable benefit for little more cost: shopping your car to used-car dealers. For instance, if you have a Volkswagen Passat and you’re considering buying a Nissan Altima, try selling the Passat to a Volkswagen dealer yourself. In most cases, a used Volkswagen is worth more to a VW dealer than a Nissan dealer.
Whether you’re working with one dealer or two, remember that combining the trade-in and new-car purchase is what you’re trying to avoid. Aside from potentially earning you a higher price, this approach simplifies the complicated new-car-buying process. Simply put, keep the trade-in aspect separate from the negotiation for purchase price.
Whoever you’re selling it to, determine your car’s value. You should also wash and detail the car and remove all personal items. A clean car makes a better impression, even on a professional car dealer.
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