Factory invoice is what a dealer paid for the car and not the actual dealer cost of the vehicle. If you pay the factory invoice price for a new car, you may save a little bit of money, but you may be leaving a whole bunch of money on the table.
Many car buyers believe a new car’s factory invoice is the bottom line a dealer will sell a new car for, this is not true! Car dealers want you to believe this myth, but the truth is, hundreds of cars are sold well below a new car’s invoice price every day. If you want to see for yourself, just pick any car you’re interested in buying and follow the steps in my article on how to get car dealers to compete online for your business.
If you haven’t done your homework, you will be at a disadvantage when negotiating a new car’s price with a dealership. The dealer knows the cost of the vehicle and you don’t. When buying a new car, truck, or SUV, knowing what the dealer actually paid for it will put you on a level playing field.
Car dealers and their salesmen love when someone walks into a dealership with their chest all bowed up and shouts something like, “I’ll buy that car for $300 over factory invoice and not a dime more, or I’m walking!”
When you walk through the door and make a statement like the one above, you’re unintentionally letting everyone in the dealership know you don’t have a clue what you’re doing and you’re most likely a weak negotiator. Salespeople will be killing each other to be the ones to sell you a car.
Don’t get me wrong; paying the factory invoice price for a new car is a lot better than paying the full sticker price. However, if you pay the invoice for your next new car, truck, or SUV. You may still be giving away a lot of your hard-earned money.
There may be several other discounts available to you, but not offered since you stated you wanted to pay $300 over the dealer invoice. Believe me, no one in the dealership will volunteer this priceless information to help save you money. You’re taught at a dealership, “It’s them or us,” the customer saves money or the dealership makes more money from the customer being unaware of discounts.
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In my career, I’ve seen factory-to-dealer incentives on some brands as high as $8,000.00 or more to help dealers move old new car inventory so they can get newer models on the lot. If you happen to be interested in a car with a rebate or incentive attached to it like that, you may be able to get a huge discount when buying your next new car.
Some dealers use large factory-to-dealer incentives to help cover people who have large amounts of negative equity (owe more than what the vehicle’s worth) in their current vehicle.
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New car buying cheat sheet – Step-by-step guide on how to buy a new car from a dealership and getting the best deal.
How discounts affect a dealer’s actual new car cost
Some new vehicles have secret programs available to further discount the price of the car. Some of these discounts can come in the form of:
Customer Rebates
Factory to Dealer Incentives
Dealer Holdback
Cash Back
Special Programs
If you’re unaware of the vehicle you’re looking at has one of these types of discounts, the dealer will most likely not offer it to you upfront. If the dealer doesn’t tell you about the additional money, they have a chance to make more money on the car deal. If you inquire about one, some dealers will negotiate the amount with you. (Dealer holdback is NOT a discount or rebate, it is additional money many car dealers will negotiate.)
You should familiarize yourself with these added savings to guarantee you pay the lowest price. After researching any additional discounts available to you, read more about new car rebates and incentives.
After figuring your fair profit offer, you can use it as a base for your negotiations. You can also use it to compare with free online price quotes sent to you by dealers to make sure you’re not paying too much for your next new vehicle.
Car Price Quotes
Use my recommended tools to find the best deals in your local area.
Find the dealer with the lowest price and save. When dealers compete = You WIN!
Are secret new car incentives available?
One of the most elusive discounts is the factory to dealer incentive. These types of incentives can affect a dealer’s actual cost of a new car. A factory to dealer incentive is extra money the manufacturer will directly pay the car dealer to help the dealer move new cars and trucks to clear the way for the latest models.
Incentives may be different amounts for different individual makes models, or even trim lines. The manufacturer will not pay out an incentive to the dealer until the dealership provides proof the vehicle has been sold.
These types of incentives are not normally advertised to the public. Most of the time even the car salesmen at the dealership don’t know which vehicles qualify for them. You must do your own research to find out if the car you want to buy has a factory-to-dealer incentive available on it.
It’s up to each car dealership if they want to share the factory-to-dealer incentive with you. Each dealer is different, some may give up all, some, or none of the incentive. It really depends on how aggressive the dealer is at pricing the car.
Factory-to-dealer incentives are one of the most common discounts overlooked by car buyers. To look up this information, I recommend going to the manufacturer’s website of the vehicle you’re interested in. Or, to make it easier, use an online referral service such as Ryde Shopper and MotorTrend. When you request a quote from one of these services, any rebates or incentives (if available) will already be included within the quote.
Recommended New Car Shopping Sites
RydeShopper has one of the largest new car dealership networks in the world. Select the make and model you’re interested in and they will instantly search clearance pricing within your local area. Don’t forget to select as many dealers as possible to increase your chances for the greatest discounts and savings.
Edmunds is one of the oldest and best new car research and review sites on the internet. Their huge dealer network allows you to shop, research and compare millions of new cars so you can find the exact vehicle you're looking for.
MotorTrend is one of the best kept secrets on the Internet. Best known for their automobile magazine, MotorTrend has a vast dealer network across the nation. Their referral service is 100% free and there’s no obligation to purchase. Just pick the vehicle you’re interested in, select local dealers, and receive discount pricing.
CarsDirect has been in online vehicle research business since 1998 and has all the right tools to help you find your next car, truck or SUV. They offer a no-hassle experience from configuring a car to making the final purchase. You’ll find your next car quickly and easily.
When purchasing a vehicle, it is advantageous to be well informed. Before you start doing some real analysis, it’s a good idea to brush up on some of the more commonly used car pricing terminologies.
You’ll have a rough time researching your way to the right details if you don’t understand what they mean. A few of the better examples of new car pricing terms are highlighted below. Click on the one below for its meaning.
MSRP
Manufacturer’s Suggested Retail Price (MSRP)
The manufacturer’s recommended selling price is referred to as MSRP. It’s the suggested sale price that a vehicle maker offers to dealers. The MSRP is, of course, just the starting point for negotiations at the dealership. When it comes to bargaining, many people completely ignore MSRP.
The MSRP, also known as the sticker price, is normally listed on the spec sheet that comes with a new vehicle. In certain cases, it isn’t even mentioned. When a vehicle is in high demand, dealers will also omit the MSRP.
The dealer will be willing to launch negotiations at a higher price if the MSRP is not advertised. It’s worth noting that the MSRP does not represent the “out the door” price you can plan to pay. Registration, fines, destination costs, and other expenses are not included.
MSRPs are used to protect customers, but they are just a very small start when it comes to buying a car at a great price.
Dealer Invoice Price
Dealer Invoice Price / Factory Invoice Price
The dealer invoice price of a new car is the price listed on a factory invoice sent by the manufacturer to a dealer when the new vehicle is purchased.
Many people presume that this is the actual dealer expense of the car, but this is not always the case. Factory invoice costs have secret benefit margins including dealer holdback and manufacturer-to-dealer discounts.
Dealer Cost
Dealer cost is the true amount a dealer pays for a new car from the manufacturer and can be much lower than the dealer’s invoice price.
Most dealers will lead you to believe that dealer invoice is their rock bottom price… however, this is false information, dealer cost is the true bottom line.
To find the true dealer cost of a new car. Take the invoice price and subtract dealer holdback and any customer cash rebates or incentives. This will tell you what the actual dealer cost of the vehicle is.
I go into a lot more detail and even provide examples on how to figure dealer cost further down this page.
Dealer Holdback
Dealer Holdback
A portion of the dealer invoice or MSRP charged back to a manufacturer by the dealership is referred to as a dealer holdback. Manufacturers typically return the percentage of money withheld every quarter, but this can vary depending on the agreement.
Dealer holdback became common just a few years ago. They are used to inflate invoice rates to increase distributor earnings. This is done mainly by decreasing the gross profit margin on the sale of a vehicle. As a result, the salesperson is not paid a percentage of the dealer’s holdback amount.
Another explanation for the popularity of dealer holdbacks, which are typically two to three percent of MSRP, is that they encourage dealers to make exclusive offers while still making a profit. Dealers will legally advertise cars at invoice prices before later recouping hundreds of dollars.
Although it’s useful to be aware of dealer holdbacks, you’re unlikely to be able to use them in your negotiations. It’s nice to be conscious of them however, dealers cling to them. You may indirectly use them to negotiate a cheaper price.
Dealer Incentive
Dealer Incentives
Dealer incentives are also known as factory-to-dealer incentives. They lower the overall dealer’s true cost of purchasing a new car. Those benefits may ( or may not ) be passed on to customers in some situations. Dealer offers are often sold on a geographic basis to boost sales of a particular make, model, or trim. Manufacturers also use special sales incentives to encourage dealers to meet a specific revenue goal.
Dealer incentives are not required to be passed on to customers by dealers. If you can find specific facts about a new dealer incentive that isn’t being advertised to the public, you may be able to leverage it in an attempt to get a lower price. However, because these incentives frequently vary by region, it is not always easy to successfully find them. It never hurts to do a little digging yourself to see if you can find the information yourself.
Destination Fee
Destination Fees
New cars must be moved from automotive manufacturing plants to dealer lots. The manufacturer charges the dealer for the cost of doing so, which is then passed on to the customer.
Typically, the overall sum is in the hundreds of dollars. As good as it would be to be able to negotiate these payments down, it just isn’t feasible. The number varies based on the type and manufacturer, but it had little to do with how much the car has to be shipped.
Manufacturer Incentives and Rebate
Manufacturer Incentives and Rebates
The most common manufacturer rebates and incentives are intended for customers to benefit from. To promote purchases, cash rebates, low-interest financing, and special lease rates are all available from time to time. These types of incentives are often marketed as first-time buyer programs, low-interest special events, employee plans, military discounts, and other bonuses.
These benefits lower the vehicle’s net price. Although it rarely happens that you will have incentives that run in conjunction, you normally have to choose between a rebate or a financial incentive.
You can use an online calculator to help you choose if a cash back rebate or a low-interest incentive is the best fit for you.
Regional Ad Fee
Regional Ad Fees
Regional ad rates are not negotiable in the vast majority of cases. This is because they are typically itemized on dealer invoices and are a fixed aspect of a dealer’s cost. They are a method for suppliers to recoup any of the costs associated with advertising and selling individual models. When you see this fee on a distributor invoice, you can bet the amount will be on your sales contract as well.
However, in some circumstances, the factory invoice does not contain these fees. If it does not, however, they are listed in your sales contract, you might have some wiggle room. It all depends on how flexible the particular dealer is and the price you are paying. Before you go to the dealership, search online for a list of regional advertisement fees by the manufacturer. This will give you a better idea of how much these fees would cost you when buying a new vehicle.
How do you figure a dealer’s true new car cost?
Information needed to calculate a dealer’s true new car cost:
Factory Invoice Price of vehicle – Find it on Edmunds.
Dealer Holdback – Figure the amount with my new car dealer holdback chart.
Rebates & Incentives – Check the manufacturer’s website for a rebate or incentive on the vehicle you are interested in.
You can find the factory invoice price at Edmunds, pick out the car you want, and once you get the vehicle’s page. Scroll to the “Build and Price button.” Sometimes they put vehicles up before they receive the invoice price information and sometimes they will sell the button to an advertiser so you have to build the car on their page. Don’t fret, you may just have to come back at a later time. Here is a picture that shows how to locate the information.
Once you have the above information on the vehicle you want to buy. Figuring the true cost of any new car is a simple formula:
Invoice Price – Factory Holdback – Factory to Dealer Incentives = Dealers Net Cost
Figure New Car Cost Example #1
$24,839.00
=
New car sticker price
$22,239.00
=
Factory invoice price
$496.78
-
Subtract dealer holdback (2% of MSRP *amount varies)
$1,000.00
-
Subtract dealer incentive ($1,000 factory to dealer incentive)
$20,742.22
=
Dealer's true net new car cost
As you can see by the example above, the dealer’s true cost of the car is $20,742.22 and is a lot less than the factory invoice price of $22,239.00. It’s $1,496.78 lower than the dealer’s invoice price to be exact.
If you can buy the car for the dealer’s actual new car cost, you would save $4,096.78 off the sticker. This translates to a savings of $113.80 a month on a 36-month car loan with no interest.
If you bought the vehicle in the above example at $300 over invoice, you would save $2,300 off the sticker price and be happy because you truly believe you received a good deal. The dealer will be happy also because they will still make a $1,796.78 profit from that same deal.
To put the dealer’s profit into perspective, you would be adding $49.91 to your monthly payment on a 36-month loan at 0% interest. Is this considered excessive profit for a car dealer? That’s for you to decide.
When it comes to factory-to-dealer incentives, the dealer is entitled to the money. You may not be able to get the whole amount when it comes to these types of incentives if any. Even if you only get half of it, you still save money. Each dealer is different, if the first one won’t negotiate it, try a different one.
Buying a new car below factory invoice
This time you get lucky and negotiate a deal to buy the car $300 UNDER factory invoice. You save $2,604 off the list price and are super excited, referring everyone you know to the great deals from the dealership.
However, since you didn’t ask, and the dealer didn’t tell you about the secret incentive that was available on the car. He made an additional $2,346.91 profit from selling you the car. Take a look at example #2 below and I’ll show you how he did it.
The $2,346.91 you could have saved, translates to $65.19 a month for 36 months at 0% interest added to your car payment. Not to mention, you gave the dealer some great word-of-mouth advertising, telling your friends and family how great they are to buy a car from. Always do your research and ask the dealer point blank if there are any factory-to-dealer incentives on the vehicle you’re looking to buy.
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Buying a car with a rebate and dealer incentive
Now let’s take this one step further. There may also be a CUSTOMER REBATE or CASH BACK attached to the vehicle you’re looking at along with a hidden factory-to-dealer incentive. Most people choose to use the rebate or cashback to lower the price of the car so they can receive an even deeper discount from the list price.
Factory Incentive & Customer Rebate #2
$29,897.00
=
Sticker price of new car
$27,593.00
=
Factory invoice price
$869.91
-
Subtract dealer holdback (3% of MSRP *amount varies)
$1,500.00
-
Subtract customer rebate
$1,750.00
-
Subtract dealer incentive ($1,750 factory to dealer incentive)
$23,446.09
=
Dealer's true net new car cost
Walking into a car dealership and buying the above car at factory invoice for $27,593 will save you $2,304, but will cost you $4,146.91. You can see not doing your homework first can keep you from substantial savings when buying your next new car or truck.
Dealers do not normally advertise factory-to-dealer incentives to the public and this makes it hard for consumers to find out if one is available. They will share customer rebates and customer cash because they’re publicly advertised and a way to draw in traffic to the dealership.
When you see an extremely low price advertised on a new car. Look in the fine print and see if the dealer used the incentive to get to the price advertised. Doing this will let you know if there is an incentive on that specific make or model vehicle.
You can also visit Edmunds to find out if a vehicle has a rebate and incentive available. The information found on the site is up to date and very accurate.
Always keep in mind the factory invoice is not the true dealer’s cost on a new car. Taking a little time and doing your research will save you hundreds, if not thousands of dollars when buying your next new car, truck, minivan, or SUV.
RydeShopper, Edmunds and Motor Trend are the quickest way to compare new car prices in your local area. These online sites will provide you with free, no-obligation price quotes and the discounts you receive will give you confidence on your next new car purchase. Walk away from the dealership knowing you received a good deal, not hoping you did.