Why Invoice Price Is Not the Dealer's True CostContrary to what many people think, a vehicle's invoice price is NOT the dealer's actual cost.
The dealer's true cost is usually hundreds, sometimes thousands of dollars below the invoice price. How can that be?
The reason: manufacturers pay hidden incentives, holdback, and other fees to dealers after each vehicle is sold.
Hidden dealer incentives are similar to cash-back rebates, but instead of going to the consumer, they are paid to the dealer. If you use my car negotiation method, you stand a good chance of having the dealer pass these hidden incentives to you through a lower purchase price.
Other types of hidden incentives include "stair-step" incentives, which are given to dealers when they hit certain sales goals. For example, a Nissan dealer may get an additional $250 bonus for each vehicle sold if they sell at least 50 cars per month. The bonus may increase to $500 once they sell 100 cars.
Some manufacturers give "credit vouchers" that dealers can use on any customer. Each dealer may have a dozen or so vouchers that can be used throughout the month to help seal deals.
On top of these hidden incentives, dealers also get reimbursed for their financing costs through holdback. This usually amounts to between 1 - 3% of the invoice price of the vehicle, which can be as high as $1,250. In many cases, when interest rates are relatively low, the holdback amount exceeds the dealer's cost of financing so this is just extra profit for them.
Finally, some dealers get reimbursed for advertising expenses, fuel charges, and servicing the vehicle. All in all, when you add up the hidden incentives and kickbacks, the dealer's true cost is usually at least $750 under invoice price, and can be as high as $10,000 under invoice (for leftover, or slow-selling models).
So next time a dealer whines to you about not making any money on the deal, you can remind them about these hidden kickbacks.
Each week, I'll keep you up-to-date on the latest car deals and news that might affect your purchase. This includes...
- Best Rebates, Incentives, and Lease Deals
- Latest Car Buying Scams and Tricks
- The Best & Worst Time to Buy a Car
- Which Cars You Should Avoid