Figure a Fair Profit Offer on a New Vehicle
How much should you offer to pay for a new car? You don't want to be ripped off by paying too much, and you also don't want to be laughed out of the dealership by offering to pay too little. Learning how to calculate a fair profit new car offer will save you time and money.
Offering to buy a new car at an unrealistic lowball price will immediately let a dealer know you're not well prepared. This may lead him to believe he has a better chance of taking advantage of you during the car buying process.
After reading this section in its entirety. You'll be able to figure a fair profit offer and present it to a dealer with confidence you're not overpaying for the vehicle.
When it's time to present your "offer to buy," you'll want to add additional pressure on the dealer by putting him on the spot. Once the dealer investigates you're figures are realistic, he'll know that you've done your homework and are ready to buy a car right now.
What you'll find in this section:
- What is a fair profit to pay for a new car?
- What to consider when figuring a fair profit new car offer.
- How to figure a fair profit new car offer.
- Fair profit new car offer examples.
- How to use your fair profit offer as a powerful negotiating tool.
What's a Fair Profit to Pay for a New Car?
I get emails asking me all the time, "how much should I pay for a car?" You should calculate your offer to be somewhere within this range:
3-5% Over a Dealer's New Car Cost = Fair Profit New Car Offer
An offer of 3-5% over a dealer's true new car cost is a very acceptable offer on a new car. Although, it's not a huge profit, a car dealer will sell a new vehicle for a 3-5% margin any day of the week. They'll make up any lost profit on the next uneducated customer that walks through the door.
There are many car dealerships across the Nation that live on about a 3% profit margin. Depending on the economy, this margin will fluctuate minimally, but 3% is the overall average.
NEVER calculate your fair profit offer from factory invoice. Dealer's lead you to believe invoice is their cost, but this is false. The invoice price of a new car is what the dealer paid for the car, not the dealer's actual true cost. For more information, read my section about factory invoice vs. new car cost.
Considerations When Figuring a Fair Profit New Car Offer
There are several things you should take into consideration when calculating your offer. Missing one or more of these items can keep you from savings that may be available to you.
- Manufacturer to customer rebate programs
- Manufacturer to dealer incentive programs
- Dealer Holdback
- Special cash back or rebate programs
- Factory added options
- Dealer added options (may or may not be removed by the car dealer)
Fees You Must Pay:
- Destination fee
- Tax, title, and license fees
- Any unavoidable state or government fees required by law
Some state or government fees are unavoidable and your responsibility to pay. These additional fees should be added after your calculated offer.
Read the buyer's order and contract carefully, pay attention to any fees a dealer is presenting to you. If something doesn't sound right, make the dealer show legal documentation or proof that you're responsible to pay for it.
How to Calculate a Fair Profit New Car Offer
The steps for figuring a fair profit new car offer is relatively easy. Rebates, incentives, special programs, and dealer holdback vary from manufacturer, this can affect the outcome of your offer. I'll show you how to figure this below.
Pick a Car, Any Car
First thing you want to do is find a vehicle. The fastest way to do this is by using free automotive websites such as TrueCar, Edmunds.com, CarsDirect, and Automotive.com. These online companies provide you with a wealth of information to help you research, review, and compare vehicles you are interested in purchasing.
Once you find a car, request a few free quotes (I recommend from at least seven different dealerships). This will give you a good idea of the demand and market for the vehicle in your local area. The higher the demand, the harder it will be to negotiate the price. Quotes also contain a lot of information that will help you calculate your offer. I've had many readers tell me they've received deeper discounts than what they actually calculated themselves.
If you already know the car you want or you've picked out one from the above sites. You're ready to proceed to the next step by figuring the dealer's new car cost.
Formula for finding a dealer's true net new car cost:
Invoice Price - Dealer Holdback - Factory to Dealer Incentive = Dealer's True Cost
Car dealers will advertise customer rebates publicly. However, they normally keep the factory to dealer incentives a closely guarded secret. To correctly figure your offer, you'll need to know if the vehicle has any secret money attached to it. You can find the most current rebate and secret incentive information at Edmunds.com.
Calculate a Fair Profit New Car Offer with an Incentive
Let's say you've found a car you would like to buy. The sticker price of the car is $31,000 and the invoice is $29,000. Dealer holdback on the vehicle is 3% of invoice which is $870. You also find there's a $2,500 secret factory to dealer incentive available also. This incentive is available from the manufacturer to the dealer to help move the car off the lot to make room for the newer models.
New Car Dealer Cost Example
|$31,000.00||=||Sticker price of vehicle|
|$29,000.00||=||Factory invoice (Including factory added options)|
|$870.00||-||Subtract holdback (3% of MSRP *amount varies)|
|$2,500.00||-||Subtract factory to dealer incentive|
|$25,630.00||=||True dealer's net cost|
The goal is to not pay more than 5% profit for your new car. Using 3% first will give you a little "wiggle room" to negotiate with the dealer. If you decide to use 3%, calculate the 5% profit margin also, so you can stay within your goal.
Now let's add the 3-5% fair profit amount to the dealer's true cost. I'm using 4% for my examples.
How to Calculate a Fair New Car Profit
|$25,630.00||=||Dealer's true net new car cost|
|$1,025.20||+||4% fair profit offer (Dealer's cost x 4%)|
|$26,655.20||=||Your total fair profit new car offer|
If you offered the dealer $100 over invoice on the above car, you would save $1,900. If you buy the car at your fair profit offer of $26,655.20 you will save $4,344.80 off the sticker price. That's a difference of $2,444.80 between you reading this website or just shooting from the hip stating, "I'll pay $100 over invoice."
Your offer is well below what an uneducated buyer would offer. However, smart car buyers like yourself need those uneducated buyers so you can get a bigger discount when you buy a new car.
When calculating your offer, DO NOT INCLUDE the destination charge, state required fees or any other changes. The destination fee and any additional fees you agree to pay will be added AFTER you calculate your offer.
Your offer $26,655.20 + $720.00 (Destination fee) = $27,375.20
The destination fee is added to the MSRP of the vehicle by the manufacturer. It is an additional charge for shipping the vehicle to the dealership. You can find this fee on the big Monroney Sticker on the side of the vehicle. It's usually located right before the total price of the vehicle and is your responsibility to pay. Keep an eye out for car dealers that try and "double-dip" you on this fee attempting to charge you twice for it.
Compare your fair profit new car offer with quotes from free new car listing sites available online. Doing this will not only let you know how "in demand" the car you're wanting to buy is, it will also tell you which local dealers in your area are more flexible discounting the vehicle's price.
Recommended New Car Shopping Sites
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.
Shop new cars at Edmunds here.
TrueCar believes the new car buying process should be transparent and anxiety free. That's why they reinvented the way people shop for new vehicles. They'll even provide you with what others paid for the vehicle you're considering.
Shop new cars at TrueCar here.
CarsDirect has been in business for over a decade and has all the right tools to help you find your next new car. Offering a no-hassle experience from configuring a car, to making the final purchase. You'll find your next car quickly and easily.
Shop new cars at CarsDirect here.
Automotive.com has thousands of new car reviews. Their tagline is "buying smart starts here." You can research and compare multiple vehicles you're interested in to make an informed car buying decision.
Shop new cars at Automotive.com here.
Fair Profit New Car Offer Examples
Sometimes your offer may be well below a new car's invoice, and sometimes it may not. Certain factors such as the vehicle, rebates, mark-up from invoice to MSRP, and incentives available will affect the outcome of your offer.
Vehicle Doesn't Have a Rebate or Incentive
For this example you would like to buy a 2015 Ford Mustang coupe. Go to Edmunds.com, look up the car, select your options and find the MSRP. The MSRP is $22,145 before the destination fee and the invoice price is $21,093. You can get the dealer holdback amount here also, or you can find it on my car dealer holdback chart. You find the holdback amount is 3% of the total MSRP or $664.35.
No Rebate or Incentive Fair Profit Offer Example
|$22,145.00||=||Sticker price of new car|
|$21,093.00||=||Factory invoice (Including factory added options)|
|$664.35||-||Subtract holdback (3% of MSRP *amount varies)|
|$20,428.65||=||Dealer's true net new car cost|
|$817.15||+||4% fair profit (Dealer's true cost x 4%)|
|$21,245.80||=||Your calculated fair profit new car offer|
If your offer comes in over the factory invoice. Start your offer at invoice and work up from there. The worse thing that happens is the dealer doesn't accept your first offer.
Fair Profit Offer With Rebate and Incentive
In the next example the vehicle has both, a customer rebate and factory to dealer incentive.
Invoice - Holdback - Dealer Incentive =
Dealer's Cost - Customer Rebate x 3-5% = Your Offer
This time you're looking to buy a 2015 Hyundai Elantra GLS. Go to Edmunds.com and enter your desired options. You find the MSRP before the destination fee to be $19,900. Invoice price with options on the car is $16,461. Now calculate the holdback amount of 3% of total MSRP which is $597. Let's see how this one breaks down.
Incentive & Rebate Fair Profit Offer Example
|$19,900.00||=||Sticker price of new car|
|$16,461.00||=||Factory invoice (Including factory added options)|
|$597.00||-||Subtract holdback (3% of MSRP *amount varies)|
|$1,000.00||-||Subtract factory to dealer incentive|
|$14,864.00||=||Dealer's true net new car cost|
|$594.56||+||4% fair profit offer (Dealer's true cost x 4%)|
|$1,500.00||-||Subtract customer rebate|
|$13,958.56||=||Your calculated fair profit new car offer|
The above offer saves you almost $6,000 off the sticker price of the vehicle. There are deals out there like this, you just have to catch them at the right time.
You now have two very important numbers. Knowing these amounts will help you in determining if you are getting a good or bad deal on the next new car you buy:
- The car dealer's true vehicle cost.
- Your 3-5% fair profit offer to buy.
If you're comparing two or more new vehicles, figure an offer on each one. Keep this information organized and handy for each car so you can refer back to them later.
Be aware, although advertising and flooring fees are listed on the invoice, they will vary between manufacturers and market areas. These fees are optional and you may or may not be able to negotiate them. They can be as high as 3% of the sticker price or MSRP and are not directly available to the public. When you get to the dealership you can ask to see the invoice and have the car salesman or sales manager point them out to you.
Use Your Fair Profit New Car Offer to Negotiate
If you haven't done so, go to all of our recommended automotive research web sites TrueCar, Edmunds.com, CarsDirect, and Automotive.com. Request free new car price quotes on the vehicle you're interested in buying. Learn how to start a new car price bidding war online here. Using this type of technique will guarantee you pay volume internet discount pricing on your next new car purchase.
Combining your free online quotes and your calculated offer is a very effective way to work dealerships against each other to get a low price when buying your next new car. Read my section on how to negotiate with car dealerships by email to learn more.
In my career I've sold many vehicles for a loss to guarantee the store hit a quota required to receive a manufacturer's bonus. For example, the bonus could be $25,000 for selling 25 Sentras in a month, and I only have 23 sold with a few days left. I don't mind losing a couple thousand dollars to make sure the store gets the bonus. I've also sold cars for a loss that have been sitting on the lot getting old. You never know what kind of mood a car dealer is in, or what they just might do to sell a car.
By calculating a fair profit new car offer, you'll have a target goal for what you should pay for your next new car, truck, minivan, or SUV. Figuring the dealer's true new car cost and adding a fair profit will let the dealer know you've done your research and are ready to buy a car without any games.
Remember negotiating is a back and forth process. Start with your lowest offer and increase it slightly with ever counter offer until you reach the maximum amount you want to pay. It's okay to spend a little more than what you've figured, it just depends on how much you want the car. Your goal is to pay as close to the amount you've figured to guarantee you pay the absolute lowest price available.
Recommended Sites for Online Car Shopping
TrueCar, Edmunds and CarsDirect 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.
Share Your Tips - If you have any tips on how to calculate a fair profit new car offer that will help others save money, please tell us about it in the comments below, so we can share it with everyone.