Car Dealer Terminology Explained—Part 1: Buying a Fresh Vehicle
A dealer addendum sticker details any dealer-installed accessories, and their prices, that may have been added to a vehicle after its arrival at the dealership. In cases when a model is brand fresh and in high request, a dealer addendum sticker may list nothing but extra markup over the Manufacturer’s Suggested Retail Price (MSRP). Keep in mind, however, that the price of dealer add-ons can be negotiated.
When a fresh vehicle arrives at a dealership from the factory, dealership personnel must prepare the vehicle for sale. Often, the dealership passes that cost to the consumer through a dealer prep charge. Sometimes dealer prep charges are reasonable. Sometimes they are not. This, too, is something that can be negotiated.
Documentation fees are designed to pay for the costs incurred by the car dealer in association with processing paperwork related to a lease or purchase. Similar to dealer prep charges, sometimes these fees are reasonable and sometimes they are not. If you feel the fees are excessive, attempt to negotiate an amount that is more reasonable.
An extended warranty gives a consumer extra warranty protection after a vehicle’s original factory warranty expires. Car dealers typically attempt to sell customers an extended warranty at the time a fresh vehicle is purchased, but consumers often have up to one year after the purchase to determine if they want to take advantage of an extended warranty plan. This, too, is a negotiable price.
This abbreviation stands for finance and insurance. When buying a fresh vehicle, consumers are sent to the F&I office to finalize the details of the deal while the dealership prepares the fresh vehicle for customer delivery. In the F&I office, extra products and services may be suggested to the consumer, such as dealer financing, extended warranties, service contracts, insurance, and more. At the end of this process, the purchase contract is finalized and signed, and then the customer drives home in his or her fresh vehicle.
A fresh vehicle depreciates the minute a consumer signs a contract and drives off the car dealer’s lot. That’s because it is now a used vehicle rather than a fresh vehicle. In the very first weeks, months, and sometimes years that a consumer is in possession of the vehicle, it may be worth less than what the consumer owes on the car loan, especially if the fresh vehicle was purchased with no down payment or a petite down payment.
Car dealers stock inventory, just like any retail store. Because vehicles are expensive, car dealers must finance inventory through the auto manufacturer using a process known as floorplanning. Car dealers must also advertise their inventory. These activities cost the car dealer money.
An incentive is an amount of money that is paid to the car dealer by the car company upon completion of a sale to a consumer. The car dealer may or may not elect to pass all or a portion of the savings on to the customer in order to lower the vehicle’s price or payment.
The interest rate is the amount of interest a consumer pays on a fresh vehicle loan, voiced as an Annual Percentage Rate (APR). The lower the APR, the better the interest rate. Interest rates are negotiable, so be sure to get the best rate possible when financing a new-car purchase.
Invoice price refers to the amount of money the car dealer pays the car company for the fresh vehicle. Generally, the invoice price is higher than what the car dealer actually pays the factory for the fresh vehicle, after accounting for any incentives, holdback money, or spiffs (defined below).
The Manufacturer’s Suggested Retail Price (MSRP) is also referred to as the sticker price. Subtract the invoice price from the MSRP to determine the minimum amount of negotiating room the car dealer has with regard to the selling price for the fresh vehicle. Vehicles in low supply and high request are likely to directive total sticker price, or higher. Other vehicles are expected to sell for a price closer to invoice.
In an effort to simplify and bring transparency to the process of buying a fresh vehicle, some car dealers suggest no-haggle pricing, which sets a stiff price for a fresh vehicle in advance. No-haggle prices are designed to give customers discounts while providing car dealers a fair profit and can make buying a fresh vehicle lighter, swifter, and less strained.
A rebate is an amount of money paid to a consumer by the car company upon completion of a new-vehicle purchase. Consumers can accept the rebate in cash, or can apply the amount of the rebate to the down payment made on the vehicle by signing the rebate over to the dealership. Reminisce, consumers must pay taxes on the rebate, which is considered income, regardless of whether he or she accepts the rebate as cash or signs the rebate over to the dealer in lieu of extra cash for the down payment.
Consumers are likely to be suggested a service contract when completing paperwork in the F&I office. A service contract is a pre-paid plan to have your fresh vehicle serviced at the dealership and typically offers a discount compared to the price the consumer might pay for dealer service without a service contract. Many fresh vehicles come with free scheduled service and maintenance, such as BMW models and Toyota models.
A “spiff” is a improvised incentive that is paid to the car dealer or a car salesperson by the car company. For example, in order to inspire improved sales spectacle during a weekend sales event, the car company might suggest the car dealer an extra $200 for every fresh vehicle sold, or the car salesperson an extra $100 for every fresh vehicle sold. Spiffs can sometimes give the car dealer extra wiggle room on price, but the amounts are typically too puny to make a large difference in terms of the price or monthly payment the consumer will pay.
Trade-in value is the amount of money a car dealer is willing to pay a consumer for the consumer’s old car. This amount of money is typically less than what a consumer can obtain for the old car by selling it herself or himself via private party. The reason the trade-in value is lower is because the car dealer is taking on any financial risk associated with the old car, including the costs associated with reconditioning the vehicle and preparing it for sale, or transporting the old car to an auction if the car dealer determines it is not right for the dealer’s used car lot.
When a consumer is “upside down” on a car loan, he or she owes more money on the vehicle than the vehicle is worth. To avoid becoming upside down on a car loan, consumers should make a larger down payment and choose a model that holds more of its original value over time.