Q. What do I need to know about how cars are priced in order to get the best deal?
A. The main thing to remember when you look over vehicle prices is that "MSRP" stands for manufacturer's suggested retail price, and you should focus on the word "suggested." It's far from the actual cost of the vehicle and, in most cases, is well above the price you should actually pay.
Here's how the system typically works. The manufacturer ships a bunch of Schnauzer 900XZs to the dealership. The dealership is billed at and pays the invoice price. Once a Schnauzer is sold, the manufacturer deposits a certain percentage of the vehicle price into a kitty for the dealer. This is the "holdback" percentage, which varies but is usually between 2% and 5%. You'll find the holdback percentage for any particular vehicle listed at many of the auto websites. (Here are a bunch of good websites: www.edmunds.com, www.autobytel.com, www.carpoint.msn.com, www.autoweb.com, www.autosite.com, www.thecarconnection.com.)
Regularly, perhaps once per quarter, the manufacturer clears out the kitty and sends the dealer a check. This holdback system permits the dealer to swear to you that he's paying a certain invoice price for the vehicle, while not mentioning that he gets a certain percentage of that price back. On a $20,000 car, a 3% holdback comes to $600 -- and it's an amount you don't have to surrender in full to the dealer.
There are additional incentives for dealers that you can learn about by doing a little digging online or in trade magazines such as Automotive News. As a very rough example, imagine that you're looking at a vehicle with an invoice price of $20,000 and an MSRP of $22,000. A dealer might tell you that he'll give it to you for just $20,500, fully $1,500 off the MSRP. But he might not mention that he's getting a $600 holdback, plus a special dealer incentive of $1,000. (Here and there, some special dealer incentives amount to several thousand dollars.) In other words, the $20,000 car is really costing him $18,400 and he's asking $20,500 of you -- looking for a whopping $2,100 profit. Naturally, car salespeople have to earn a living, but that profit sure looks larger than it needs to be.
With a bit of research under your belt before you approach a salesperson, you can create a win-win result, with the dealer netting a modest profit and you not getting taken to the car wash.
For much more on the ins and outs of the car-buying process, check out the Fool's How to Buy a Car area and ask any questions on our Buying and Maintaining a Car discussion board.
This question and answer is taken from The Motley Fool Money Guide: Answers to Your Questions About Saving, Spending and Investing. For answers to this and 499 other common money questions, check it out -- it's a handy resource (and a terrific holiday gift!).
RSS Headlines
Fool UK
