From APR to MSRP and Beyond: Understanding the Financial Side of Your Vehicle Deal
Buying a new vehicle is always exciting. Picking out the right color, options and accessories – let’s just admit that it gives us a bit of a thrill.
But the deal’s not done until the paperwork is signed. And the paperwork – that legally binding contract that makes the vehicle yours – is all about terms and conditions and numbers. It also contains industry-specific wording that buyers may be unfamiliar with or find confusing.
Having a grasp of some of these concepts can help you approach your next vehicle purchase with confidence.
The Basics:
MSRP: Most people are familiar with this term, which means manufacturer’s suggested retail price. Also known as list price, MSRP is what the automaker suggests the dealer charge for the vehicle before any applicable taxes – for instance, sales tax or gas guzzler tax – and fees are added.
Federal regulations require dealers to display MSRP on the window sticker of new vehicles, along with the model year, trim level, EPA fuel economy ratings, factory-installed options and any other relevant information. When everything is added up, the total is known as the sticker price.
Invoice: Sometimes known as “dealer cost,” the invoice price is roughly what the manufacturer charges the dealer for the vehicle. It usually includes freight charges, also known as destination charges.
But the invoice amount is often higher than what the dealer actually pays for a vehicle because dealers also may receive manufacturer rebates, allowances, discounts, incentives and holdbacks – more on these in a moment – that figure into their price.
For many buyers, knowing the invoice price can be a starting place for negotiations – also known as haggling. At Mullinax dealerships, we don’t haggle. We make the buying process simple and transparent and put the price you pay right on the window sticker. All we need to do add is sales tax, tag and title and you’re out the door.
APR: This is an abbreviation for another term that many people are used to – annual percentage rate. APR refers to the cost of your loan, which consists of the price of the vehicle, the interest rate and any additional fees. APR depends heavily on your credit score – the better/higher your credit score, the lower your APR will be.
Lenders can’t tell you the exact APR until you start applying for loans, but – to avoid surprises – you should have a general idea of your credit score and what rate you could qualify for before you begin the buying process.
Contacting banks, credit unions and online lenders to find the best loan rate for your budget is a good idea. Lenders can also pre-approve you for a certain amount.
The experienced finance team at your Mullinax dealership also can help you through the process. We work hand in hand with top lenders, both locally and nationally, which offers you a wide range of options for the perfect loan. Our experts can also aggressively negotiate with lenders on your behalf, working to reach a deal that puts your needs first. If you choose, we can arrange direct financing through the manufacturer such as Ford Credit.
Incentives: An incentive is a financial strategy that manufacturers use to motivate dealers to sell their products by offering buyers some sort of discount. Dealers and automakers may want to spur sales of slower-selling vehicles, realign inventory or motivate salespeople to continue after sales goals are met.
Incentives can come in many forms, including cash rebates, low or even 0 percent finance rates, discounts or equipment upgrades.
Rebates: Sometimes referred to as “cash back” or “bonus cash,” rebates are the simplest type of incentive – essentially cash that buyers can use toward their down payment or to lower the purchase price, lease amount or financing of a vehicle.
Rebates often include offers for repeat buyers, certain new buyers, members of the military, first responders, recent graduates or other groups the dealer or manufacturer wants to incentivize to buy or lease a vehicle.
Dealer discounts: These are discounts a dealer uses to promote a particular vehicle on the lot. Buyers can usually recognize them by language such as “only [x number] at this price.”
Non-cash incentives: Not all incentives are about money. Her are a few that dealers offer to sweeten the deal.
- Equipment upgrades: Forget the undercoating. If you have a choice, go for an upgraded sound system, extension on the satellite radio intro period or accessories that might be installed at a dealership, such as bike racks or luggage carriers.
- Aftermarket warranty coverage: options may include an extended powertrain or general warranty of gap insurance to cover the cost of replacing the vehicle if it’s totaled in an accident.
- Service perks: Options might include free scheduled maintenance such as oil chances, as well as car washes, loaner vehicles or shuttle service from the dealership.
Government incentives: Federal, state and local government may also offer incentives, usually in the form of tax credits. The most well-known is the electric vehicle tax credit designed to increase the affordability of electric or plug-in hybrid vehicles. Buyers could qualify for a tax credit of up to $7,500, which could be factored inti the payment structure. It’s not a cash rebate, however – buyers still have to pay or finance the entire purchase price, and not all buyers qualify for the maximum amount.
Manufacturer-specific discounts: Like many manufacturers, Ford Motor Company offers discounts – known as A, Z, D and X Plans – for special buyers.
- The A Plan is for active Ford Motor Company employees and is the best discount offering.
- The Z Plan is for Ford Motor Company retirees. It is identical to the A Plan and the two are often referred to together as the A/Z Plan.
- The D Plan is intended specifically for dealership salespeople and staff and their immediate families.
- The X Plan is for friends and non-immediate family members of Ford or dealership employees, or members of partner organizations that have a special connection with Ford.
Other industry terms:
Dealer holdback: This is money that a manufacturer charges the dealership when it buys a vehicle, then returns at the end of the quarter or the year after the vehicles have been sold. The amount generally ranges between 1 percent and 3 percent of MSRP. Each automaker offers a different amount, and holdbacks are predetermined for each vehicle.
Why would a dealership participate in holdbacks? Because – at dealerships where haggling is the norm – holdbacks provide an opportunity to make a profit when a vehicle sells at or below invoice, as sometimes happens when dealerships need to reach their volume-based sales goals.
Funds are often used to cover operating costs such as paying rent or employees.
The practice is somewhat controversial. Some consumer advocates consider it “hidden profit” and advise buyers to use the holdback as a bargaining tool. Others argue that trying to cut into a dealer’s holdback is not cool and buyers should focus instead on negotiating a fair price.
Dealer fees: Fees that some dealers charge to jack up the price of a vehicle. Dealers give them a variety of different names, including documentation fees, title processing fees, electronic title fees and reconditioning fees, among others. Then they stack them up and you, the consumer, end up paying more than you should for a vehicle.
Mullinax Ford dealerships never charge dealer fees. We believe in being transparent about selling vehicles and welcome questions about any part of the process. Visit Mullinax Ford today and experience the Up front® Pricing difference.
