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Buying a New Car: How to Play the Game

2019-01-14 - ipd Staff

Disclaimer: Direct from ipd’s Tech Tip archive!  This tech tip contains information from previous publications.  Products mentioned may not be available or the information may not be accurate due to changes in supply, manufacturing, or part number association.  Please contact ipd Customer Support if you have further questions.

In the market for a new model vehicle? Unless you enjoy negotiating and understand the pricing gimmicks of the car-buying game, you may need help.

The auto industry has traditionally sold its products similar to the style used in an open market bazaar. Some people call it negotiating; others call it haggling. The disadvantage that most buyers have is they nor-mally don't purchase items by dickering. They pay the listed price. With car sales, though, the system is differ-ent and while many customers are aware of the game, they don't know how to play. The result is car buyers often feel taken.

No matter how you look at it, car buying anxiety can be a real issue, especially when you feel you're in the disadvantaged group of buyers. As a tentative step toward making the new-car buying process more like the buying other consumer goods, the concept of 'no-dicker stickers' has been introduced. With this approach, cars are tagged with a price, which is deemed reasonable for both the buyer and the dealer. This may be the easy way out for anxiety prone buyers; look for 'no-dicker stickers' and take the price with no questions asked.

If you're not satisfied with the 'no-dicker method', there is another alternative. You can educate yourself to the basics of car pricing. This is no small task. Manufacturers and dealers confuse consumers with a variety of prices, fees and incentives. Terms such as Dealer-Added Sticker Price, Added Dealer Profit, or a Market Value Adjustment may simply be ways to part you with your money. You could also be hit with a Preparation Charge, reportedly for readying the car for the buyer. A Documentation (or sales processing) Fee might be added to the tab. Dealers have also been known to pass on an Advertising Fee. The Factory-to-Dealer Rebate is another payment made to the dealer by the manufacturer. A factory-to-dealer rebate is usually offered only on slower selling models. Some dealers pass this along to customers. Yet another rebate is a Factory-to-Customer Rebate. This is paid directly by manufacturers to the customer and again, available only on slow moving models. These rebates are often widely advertised and may run from $200 to $2000.

One way to avoid the confusion is to base your buying price on the dealer's Invoice Price. This is the amount the dealer pays to buy the car from the manufacikurer. Even this is not accurate across the network of dealers. Most manufacturers pass on a 'holdback amount' back to dealers which is often 2-3 percent of the Manufacturers Suggested Retail Price. This means that a dealer can potentially sell a car at the invoice price and still make money.

What do you do once you've discovered the 'dealer-invoice price' for car and its options? First, you should add a destination price, which should run between $300 to $700. To this, add an advertising fee, which should

be no more than 1 to 3 percent of the car's invoice price. Then subtract any factory-to-dealer or factory-to-cus-tomer rebates. Lastly, add a reasonable markup. The best way to know what is reasonable is to know what is not.

What is not realistic, says the National Automobile Dealers Association, is to expect to buy cars at $100 to $300 over invoice on a product that averages $18,000. Still, some consumer advocates say you can often pur-chase a new car for a 2-7 percent markup over invoice. Market dynamics and what region of the country you're buying in make a big difference.

Your ability to negotiate price is also defined by what you expect for a trade-in value on your old car. Dealers will bargain harder on the new car price if you receive a premium on your trade-in. You're often better off selling your old car yourself.

So what does all this mean to you if you're not a Henry Kissinger-styled negotiator or lack a knowledgeable friend? Educating yourself will probably return you a payoff but there isn't a magic formula, which will work on all models.