When you purchase new cars, you will hear phrases or terms such as MSRP, sticker price, and dealer invoice. If you are new to buying new cars, it’s likely that you’re not yet familiar with these car pricing terms. Car buying has a language of its own and it’s important to learn and understand these nuances for you to get the best deals. If you want to learn what these car pricing terms mean, you’re in the right place. Today, we are going to give you some of the new car pricing basics for you to understand what they mean.
What Is MSRP or Sticker Price?
MSRP stands for Manufacturer’s Suggested Retail Price. It is the price that the manufacturer sets and recommends which a dealership charge for its vehicles. It can also be a helpful starting point when figuring out how much car you can afford and negotiating with car dealers. This suggested retail price is also known as the “sticker price” of the vehicle. Based on federal law, the vehicle’s MSRP should always be displayed on the car window.
The car dealer does not have to follow the price given by the manufacturer. It’s because this price does not include optional features for the vehicle that customers can select. These add-ons along with other costs can raise the price of the vehicle above the MSRP.
While the MSRP makes up the bulk of the cost of a new vehicle, it is important to keep in mind that it is not necessarily the selling price and it also does not include every potential cost. If you want to know the things not included in MSRP, here are some of the common ones:
- Invoice Price: This is the prices the car manufacturer charges the seller for the vehicle. This price usually includes any destination and delivery charges for the car.
- Destination Charge: This is the cost that the dealer spent when transporting the vehicle from the manufacturer. It is also known as the freight charge.
- Registration Fees: These are what you will be charged to own a car in a particular place. Registration fees vary depending on which state you live in.
Should you pay the MSRP? Well, this actually depends on you but you certainly need to negotiate. It’s important to remember that the MSRP is only a suggested retail price by the manufacturer and it is not fixed. When you negotiate, dealers may be willing to budge on the price to lower your cost to a number that could be 10% or 20% lower than the MSRP.
There are also times when a dealer will not negotiate at all on MSRP, especially when it’s a new vehicle or if it is in high demand in your market. But it is still great if you ask so that you’ll know what kind of deal might be possible.
What Is Dealer Invoice?
Dealer invoice or dealer cost is the price that appears on the invoice which the manufacturer sends to the dealer when the dealer receives a car from the factory. Vehicles are shipped by manufacturers with invoices, which are the bills from them to the dealer for each vehicle. That amount for the vehicle is needed to be paid by the dealership and anything over that will be a profit.
The dealer cost or invoice is not a dealer’s true new car cost. It is what a dealer paid for the vehicle and not the actual cost of the vehicle. This means that if you pay the factory invoice for a new car, it is possible that you can save a little bit of money. However, you will still be leaving a whole bunch of money on the table.
The dealer invoice is always higher than what the dealer actually pays to a manufacturer for a car because of a situation known as a holdback. It is a grey area that dealers are reluctant to discuss with customers, and as well as manufacturer-to-dealer credits that are not passed on or shared to customers.
Holdback reflects a percentage of the MSRP or invoice price that is paid back to a dealer by the manufacturer. It is usually paid back quarterly, but practices vary. They are used to improve dealer profits through inflating invoice prices. They reduce the gross profit of a sale and in turn, the salesperson who was involved in a transaction earns a lower commission.
It is smart to know about dealer holdbacks, however, you will not be able to use them during your negotiations. But you can simply use them in a roundabout way to negotiate a lower price.
These are some of the new car pricing basic terms and phrases that are important to learn and understand when it comes to purchasing cars. We hope the information we shared will be able to help you further understand how these terms work. If you want to know more, you can also check out our post on What is Dealer Invoice – And Why It Matters for more information.