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Auto pricing terms

Terms to be familiar with when shopping for a car

Last updated: March 2014

The most effective way to negotiate a new car’s price is to find out what others in your market have paid for the same vehicle. You can gather information from a variety of sources and put it together yourself, starting with the dealer’s cost and bargaining up from there. To figure out the true dealer cost on your own, you have to piece together the various elements of the auto-pricing puzzle.

Alternatively, you can use the ConsumerReports.org Cars Best Deals Plus service, which does all the legwork for you. Whichever way you go, here are the terms with which you should be familiar when shopping for a car:

Manufacturer’s Suggested Retail Price (MSRP). This is the price that the automaker publishes for any given model and trim line. Because it’s “suggested,” dealers are free to sell a vehicle for a figure that’s higher or lower than the MSRP. The “base price,” excluding any options, destination charge, or other fee, is the initial figure you’ll find in pricing guides, most car reviews, and on pricing websites. The “total MSRP,” commonly called the “sticker price” because it’s the bottom-line figure on a car’s window sticker, is the base price plus any options, option-package discounts, and destination charge. Unless a model is in very high demand, you can generally buy a vehicle for less than the sticker price.

Dealer-invoice price. The “invoice price” is the figure printed on the dealer’s invoice from the manufacturer. Once difficult to find, invoice prices are now commonly available online and in printed pricing guides, such as Consumer Reports’ Ratings & Pricing Guides. In fact, dealer-invoice prices have become so ubiquitous that they are even listed on some automaker websites. In addition, at many dealerships, salespeople will show you the invoice for the car you’re interested in, often as a way to let you know how “little markup” there is.

The dealer-invoice price, however, is not necessarily what the dealer really paid for the car because there are often behind-the-scenes payments, such as unadvertised dealer sales incentives and holdbacks (or manufacturer refunds) that give the dealer extra profit. What you see on the invoice is only part of the pricing puzzle. You’ll need a few more pieces to form the complete picture.

Dealer sales incentives. These are unadvertised payments that the manufacturer offers a dealer for selling certain models. The dealer can pass along the incentive to the buyer in the form of a price reduction, or keep it as added profit. These payments are usually used to push sales of slow-selling or overstocked models. These types of incentive programs can come and go quickly depending on supply and demand, and some can be regional, depending on local market conditions.

Holdbacks. You can think of a holdback as a refund for the dealer that he or she gets after the vehicle has been sold. Depending on the automaker, a typical holdback is about 2 or 3 percent of either the MSRP or the invoice price. For example, if a vehicle has an MSRP of about $25,000, a dealer’s holdback might be as much as $800. Holdbacks are a way of reimbursing dealers for the financing costs of keeping vehicles in inventory. Because the dealer will receive the entire holdback amount, the sooner the vehicle sells—thereby reducing the finance costs—the more hold-back that can be kept as profit.

Dealers usually won’t bargain away their holdback, but knowing about it gives you perspective on their profit margin. So when the salesperson claims that the dealership isn’t making any money on a car, you’ll know whether it’s just a line or not. CR’s New Car Price Reports include a vehicle’s holdback amount, information that’s hard to find elsewhere. To make the negotiation simpler, every price report includes the CR Bottom Line Price, which subtracts any incentives, rebates, and the holdback from your region’s dealer-invoice price and adds in regional marketing costs, to give you a good starting point for your negotiations.

Rebate. This is a direct-to-the-buyer payment from the manufacturer to encourage you to purchase a particular vehicle. Many buyers use it as part of the down payment to reduce the amount that needs to be financed. Rebates are widely promoted in advertising but they can be national or regional, and they don’t last forever. It pays to check out the details.

Market adjustment. If there is exceptional or thousands of dollars over the manufacturer’s sticker price. You’ll typically find these on a highly anticipated model that’s been recently introduced or one that has a long waiting list of buyers. You can try to negotiate this figure but if the vehicle is selling well, the dealer won’t have much incentive to work with you. If you have to be the first on your block with a hot new model, this could be the premium you pay. But if you can be patient and wait awhile to buy—sometimes only a few months—these dealer adjustments will usually disappear.

New Car Buying Guide

Learn more about choosing a car, what to do at the dealership, pricing, trading in your car, financing, closing the deal and more in our new car buying guide.




   

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