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Factory Invoice is not a Dealer's New Car Cost

Man and woman bought new car below factory invoice. | AutoCheatSheet.com

Contrary to popular belief, a new car's factory invoice is not a dealer's true new car cost. Many car buyer's assume this to be true, however it is not. Factory invoice is what a dealer paid for the vehicle and not the actual cost of the vehicle. If you pay factory invoice for a new car, you may save a little bit of money. But you may also still be leaving a whole bunch of money on the table.

"Information is Power!"

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.

One of the most closely guarded secrets in a car dealership is the true net cost of a new car. This information, as well as it's guarded, is not hard to find as long as you know where to look. This section will provide you with the information you need to determine a car dealer's actual cost of any new car you decide to buy.

Factory Invoice vs. New Car Dealer Cost

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 dealer's to compete online for your business.

Car dealer's 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 one to sell you a car.

Don't get me wrong; paying factory invoice price for a new car is a lot better than paying full sticker price. However, if you pay 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 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.

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 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, it's 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.

Secret New Car Incentives May be 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 individual 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 is 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 CarClearanceDeals and Edmunds. When you request a quote from one of these services, any rebates or incentives (if available) will already be included within the quote.

Use online automotive research sites to request free no-obligation new car price quotes. This will give you a good idea of which car dealers in your local area will be more flexible with their pricing. By comparing the quotes you receive with what you figure the dealer's cost to be will let you know if there is still room left to negotiate a better price.

Getting as many free online quotes up front will let you know if the vehicle you want to buy is a "high demand" or "desirable" vehicle. If this is the case, you may find some car dealers will be less likely to discount the vehicle at this time. It's the old negotiating rule of "Supply and Demand." Don't get frustrated, it's better to know this information upfront instead of wasting hours in a car dealership later. You just need to make a personal decision, how bad do you want the car?

How to Figure a Dealer's True New Car Cost

Information needed to calculate a dealer's true new car cost:

You can find 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.

new car factory invoice pricing example | AutoCheatSheet.com

Once you have the above information on the vehicle you want to buy. Figuring the true cost on any new car is a simple formula:

Invoice Price - Factory Holdback - Factory to Dealer Incentives = Dealers Net Cost

Figure New Car Cost Example #1

$22,239.00 = New car sticker price
$22,239.00 = Factory invoice price
$444.78 - Subtract dealer holdback (2% of MSRP *amount varies)
$1,000.00 - Subtract dealer incentive ($1,000 factory to dealer incentive)
$19,394.22 = Dealer's true net new car cost

As you can see by the example above, the dealer's cost of $19,394.22 is a lot less than the factory invoice price of $20,893.00. It's $1,498.78 lower to be exact. That's around $40 extra a month on a 36 month car loan with no interest.

So, if you bought the vehicle in the above example at $300 over invoice, you would save $1,100 off the sticker price and would be happy because you thought you got a good deal. The dealer will make $1,744.78 profit from that same deal. To put it in perspective, that translates to $48.46 a month for 36 months at 0% interest added to your monthly car payment.

Is this excessive profit for the car dealer? Personally I don't believe so, but I'm a dealer. That's for you to decide. You may not be able to get the whole amount when it comes to dealer incentives. Even if you only get half of it, you're still saving money. Each dealer is different, if the first one won't negotiate it, try a different one.

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 an incentive attached to it like that, you may be able to get a huge discount when buying your next new car.

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 you bought. 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.

Figure New Car Cost Example #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)
$1,750.00 - Subtract dealer incentive ($1,750 factory to dealer incentive)
$24,946.09 = Dealer's true net new car cost

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. You also gave the dealership some word-of-mouth advertising, telling your friends and family how great they are to buy a car from.

Buying a Car with a Rebate and 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 cash back to lower the price of the car so they can receive an even deeper discount from the list price.

Factory Incentive & Customer Rebate Example

$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.

How to Find Secret Dealer Money Online

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 publically 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.

Finding a car dealer's true new car cost is the first step in getting the lowest price on your next new car. After finding the dealer's cost, your next step is to read our section on how to calculate a fair profit new car offer. This will give you a solid no-nonsense figure to present to the dealer when you're ready to purchase the vehicle you want to buy.

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How to Get the Best Price

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Competition between dealers is the best way to ensure you get the best price. You win when dealers compete!