Everything you ever wanted to know about the "Dealer Prep Fee Scam" but didn't know who to ask. This scam goes by many different names within the retail car sales industry which include "Excessive Prep Fee Scam," "Make Ready Fee," or "Vehicle Prep Fee."
When a new car or truck arrives at a dealership from the manufacturer it must be made ready or prepped for sale by the dealer. Most car dealers will charge you a dealer prep fee for this service.
So how does a dealer prep fee become a scam? When a dealer attempts to grossly overcharge you for the service. The Auto Cheat Sheet exposes how this fee allows a car dealer to nickel and dime you to death by using one of the most profitable car dealer scams associated within the car buying process.
What is a Car Dealer Prep Fee?
A dealer prep fee is a set amount charged by a car dealership to cover the cost of making a new vehicle ready (prepped) for sale, when it arrives on the lot from the manufacturer.
Many dealers have a set amount straight across any car sold. Some dealers have recently started making it a percentage of the factory invoice price of the car.
Dealers normally charge an excessive amount for this service. It can be anywhere from a $500 to a few thousand dollars depending on the dealer. Realizing the profit potential, some dealers have started charging this excessive fee on used cars also.
When a dealer receives a new vehicle from the factory they must remove the protective plastic coating covering the inside and outside of the vehicle, check the fluids, install fuses, road test 3 to 10 miles, wash, wax, vacuum, put on the antenna, and install the license plate holders.
Manufactures normally allot 2 to 3 hours for dealer prep to be performed at a dealership and most dealers are compensated by the manufacturer for the service. However, a dealership with a good prep department can have it done in a little under an hour. The same is true for used cars depending on reconditioning and if any parts to be replaced.
When a Dealer Prep Fee Becomes a Scam
Not quite sure if I would call this a dealer scam. A dealer prep fee is more like an "excessive fee" charged to a customer. A dealer prep fee becomes a scam when a dealer excessively marks up the fee well over what it actually costs to perform the service. Some dealer's add a pre-delivery or dealer prep fee on every used car they sell.
This is justified by telling the customer the used car must be prepped for sale when it's purchased from auction or taken in on trade. Although a dealer will spend money to bring a used car up to retail sales quality, these charges were deducted from the vehicle at the time of purchase (or should have been) and then are added again to the cost of the car.
A dealer's make-ready department must follow a specific process set by the manufacturer to prep a new vehicle when it arrives from the manufacturer. There are specific tests, inspections and steps the manufacturer wants to ensure the dealer performs before making a vehicle ready for sale. The best way to make sure a dealer does this correctly is to pay them for it.
If you inspect the M.S.R.P. sticker on any new car, you'll find the manufacturer's statement about the dealer prep fee. It's normally located under the total suggested retail price or in fine print somewhere near the bottom of the sticker.
The manufacturer's preparation fee statement will read something like this:
Manufacturer's Suggested Retail Price Includes Manufacturer's Recommended Pre-Delivery Service. Does not include dealer installed options and accessories, local taxes or license fees.
This fee is built into the new car's price from the manufacturer. So if you're paying for it in the price of the car. Why pay it again to the dealer?
Some dealers have fought to have this statement removed from several manufacturers' M.S.R.P. stickers. The statement may now be listed on a separate sticker or will be listed on the dealer's purchase agreement.
A dealer can charge any additional fees they wish. It's not considered illegal as long as the dealer discloses the fee or any other fee to you on the purchase agreement. It's up to you if you're going to pay it or not.
Most car dealerships, including my own, will have the make ready fee pre-printed on the purchase agreements. This gives most car buyers the illusion that the fee is mandatory and must be paid if they want the car. You would be surprised how many people don't even question a dealer prep fee and just skim right past it.
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How Much can Dealers Profit from Excessive Prep Fees?
If the dealer has a $595 vehicle prep fee on every new car they sell and they average 225 new cars a month. They will make $133,875 in prep fees alone and this is on top of any other profit made from the sale of the cars.
What if they don't get everyone to fall for the excessive fee? Let's say half of the people refused to pay the fee and they only sold 127 new cars with the added charge. The dealer will still make an additional $75,565 for the month. This is why car dealers attach a make ready fee to every new car they sell, it's all about the numbers.
How a Dealer Prep Fee Affects Your Payment
I want to show you how the dealer prep fee will affect your payment. If you decide to look past this excessive fee and not refuse to pay it, you'll cost yourself some money. The example below demonstrates how much a $595 dealer prep fee will cost you in addition to your car payment and the total over the life of your car loan.
- $595 at 7% x 48/months = $14 per month or $672 total
- $595 at 7% x 60/months = $12 per month or $720 total
- $595 at 16% x 48/months = $14 per month or $816 total
- $595 at 16% x 60/months = $14 per month or $840 total
As you can see the more a dealer charges, the more it will end up costing you. Especially if you decide to finance the excessive fee over the entire life of the car loan.
How to Avoid the Dealer Prep Fee Scam
- Avoiding the dealer prep fee is as easy as refusing to pay it. If the fee is pre-printed on the purchase agreement have them cross it out and have the dealer initial it or if they say they aren't allowed to remove it, have them discount the car to match the amount of the fee.
- Bypass car salesman by shopping for a car from the comfort of your computer. Competition between dealers always gets you the best price, learn how to use the Internet to get car dealers to compete online by getting new car price quotes online.
- Most dealers will not have a problem removing the fee to sell a car. They realize some people will refuse to pay it. But the majority of people just look right past it. The dealer prep fee is not illegal. It's up to you if you pay it or not.
- Don't talk to several salespeople at the same time. Dealers may use this technique, overloading you with information, to confuse you into buying a car without making good car buying decisions.
- Do your homework first before contacting a car dealership. Decide on the vehicle you want to buy and get quotes from the best car buying websites before making them an offer.
- Don't visit a car dealership alone. Take a close friend or family member with you. Fast talking salespeople are very talented in manipulating you into buying something you don't want or worse yet, can't afford.
- If a dealer refuses or insists they cannot remove the fee, you will have to decide how bad you really want to buy the car. Do not let them talk you into something you don't want to do or don't feel comfortable with. You can always go to another dealer with the price you've already negotiated and tell them if they honor the previous dealer's price and drop their dealer prep fee, you will buy the car from them.
Familiarize yourself with more common car dealership scams here.
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