New Car Purchasing FAQ

[David@vwvortex]

New Car Purchasing FAQs

How do I know if I am getting a good deal?

There are many factors that determine what is a good price for a car. Supply
and demand is one of the most important. If the car you want is in high demand
then you can be sure that you will pay a higher amount above invoice than a
car that is not.

The first thing you want to do is to calculate the dealer’s cost (invoice)
on the car. Never work from the sticker price (MSRP) down. Always work from
invoice up. Once you have the invoice price of the car, including options, you
need to determine a fair selling price. Two sites that can assist you in
determining this are http://www.edmunds.com and http://www.carsdirect.com .

Edmunds.com has what they call their TMV or True Market Value. TMV reflects
the average of the transactions within your region. Variable factors, such as
the inventory levels of a specific dealer, or how eager the dealer is to sell,
may also affect the TMV price. There is a calculator that has you select the
specific car and options you want and it will tell you what the TMV is. I
would suggest always offering less than the TMV to begin with, hoping to close
the deal at or under TMV. TMV does not necessarily reflect the best deal you
can possibly get, just what a fair deal would be.

CarsDirect has an excellent configurator that will allow you to “build�
your car and then tell you what the invoice is and also what a dealer in your
area is willing to sell the car to you for. This is an excellent negotiation
tool since if a dealer insists that he can’t go any lower and CarsDirect
shows a lower price, you can just “threaten� to buy the car online.

One thing to remember is that car dealers are in the business to make money,
not to loose it. They are entitled to make a fair profit on every car they
sell. Demanding to buy a car at invoice only helps to promote the
confrontational atmosphere that most car buyers dread. Use the above
referenced resources as a guide to what a fair price is and you will have a
much more enjoyable car buying experience.

What is the holdback?

Dealer holdback is a percentage of the MSRP or invoice of a new vehicle that
is paid to the dealer by the manufacturer to assist with the dealership's
financing of the vehicle. It is almost always non-negotiable, because it is
designed to help the dealer cover some of the extraordinary costs of doing
business. Think of it as a forced-savings plan for the dealer. However, by
knowing about the holdback, you can use it as a negotiating tool in some
cases. First, a little more background.

The total invoice cost of the car is due to the manufacturer, payable by the
dealership, when the vehicle is ordered, not when it is sold. Since car
dealerships (or any retail operation, for that matter) must have an inventory
on hand through which the consumer can browse and ultimately select a vehicle,
they must borrow money from the bank to pay for that inventory. The
manufacturer pays for financing and maintenance for the first 90 days the
vehicle is on the lot, in the form of a quarterly check called a holdback.
After the first 90 days, the dealership dips into its own pocket, and into its
own profit, to finance the car. Fortunately, most cars don't stay on the lot
for three full months.

This amount is "invisible" to the consumer because, unlike the destination
charge, it does not appear as an itemized fee on the window sticker and is
included in the invoice cost of the car. If the car sells within 90 days of
arrival on the dealer's lot, he is guaranteed a profit even if the vehicle is
sold to you at cost. Because of the holdback, the dealer can advertise a car
at $1 over invoice and still make hundreds of dollars on the sale.

For example, let's say you're interested in a vehicle with a Manufacturer's
Suggested Retail Price (MSRP) of $20,500, including optional equipment and
destination charge. Dealer invoice on this vehicle is $18,000, including
optional equipment. The invoice includes a dealer holdback that, in the case
of this manufacture's vehicles, amounts to 3 percent of the total MSRP. (The
$500 destination charge should not be included when figuring the holdback.)
So, on this vehicle, the true dealer cost is actually $17,400, plus
destination charges. Even if the dealer sells you the car for invoice, which
is unlikely, he would still be making as much as $600 on the deal when his
quarterly check arrived. That is profit to the dealer only; the sales staff
doesn't see any of it.

So, if you offer the dealership a nominal profit (3 percent over invoice in
this example) for this vehicle, or $18,540 plus the destination charge, the
dealer and the sales staff are making as much as $1,140 and you're still
getting a good deal by paying $1,460 less than the MSRP. (Remember that this
price doesn't include destination or advertising charges, additional fees,
tax, or license plates.)

However, the true "profit" of holdback money depends on how long the car has
been on the lot. If our vehicle had been sitting there for 45 days before you
bought it, the dealer's holdback profit is only half of what it could have
been, or only $300, cutting total profit on the deal to $840. At the 90-day
mark, holdback profit has disappeared.

Dealer holdback allows dealers to advertise big sales. Often, ads promise that
your new car will cost you just "$1 over/under invoice!" Additionally, the
dealer stands to reap further benefits if there is some sort of dealer
incentive or customer rebate on the car. Generally, sale prices stipulate that
all rebates and incentives go to the dealer. Using the example above, let's
see what happens when there is a rebate.

Suppose the car described above has a $1,000 rebate in effect. You need to
subtract that $1,000 rebate (remember, the dealer is keeping the rebate) from
the dealer invoice of $18,000, which results in a new dealer invoice of just
$17,000. Now, you must calculate a fair price, using the Edmunds TMV or
CarsDirect price. In this example, TMV is $17,510, which means that the price
you should try to buy the car for is $510 over invoice, plus destination,
advertising, taxes*, and fees. The dealer is still making as much as $1,110
and you're paying $2,490 less than the MSRP. Remember, the longer the car has
been in the dealer's inventory, the less money the dealer is making.

Almost all dealerships consider holdback money sacred, and are unwilling to
share any portion of it with the consumer. Don't push the issue. Your best
strategy is to avoid mentioning that you know the holdback amount and what it
is during negotiations. Mention holdback only if the dealer gives you some
song-and-dance about not making any money when you know that isn't true.

So how can you truly benefit from holdback information? Well, if the
dealership doesn't have that pretty green color you're interested in, and they
can't find it at another dealership in the area, they have to order it
directly from the manufacturer. If that's the case, make sure that they know
that you know about the holdback. If a vehicle is special-ordered, holdback
money is pure profit, and you will need to factor this into price
negotiations.

Domestic manufacturers (Ford and GM) and the Chrysler half of DaimlerChrysler
generally offer dealers a holdback equaling 3 percent of the total sticker
price, or MSRP, of the car. Import manufacturers (Honda, Nissan, Toyota, etc.)
provide varying holdback amounts that are equal to a percentage of total MSRP,
base MSRP, total invoice or base invoice.

When calculating a holdback, use the following guidelines. If a holdback is
off the:

1) Total MSRP, consumers must include the MSRP price of all options before
figuring the holdback. 2) Base MSRP, consumers must figure the holdback
before adding desired options. 3) Total Invoice, consumer must include the
invoice price of all options before figuring the holdback. 4) Base Invoice,
consumers must figure the holdback before adding desired options.

Following is a current list of makes and the amount of the 2001 dealer
holdback.
Acura 3% of the Base MSRP
Audi No Holdback
BMW No Holdback
Buick 3% of the Total MSRP
Cadillac 3% of the Total MSRP
Chevrolet 3% of the Total MSRP
Chrysler 3% of the Total MSRP
Daewoo One-price sales. Customer pays MSRP.
Dodge 3% of the Total MSRP
Ford 3% of the Total MSRP
GMC 3% of the Total MSRP
Honda 3% of the Base MSRP (except Prelude, which has a flat-rate holdback)
Hyundai 2% of the Total Invoice
Infiniti 1% of the Base MSRP (holdback) + 2% of the Base Invoice
(floorplanning allowance)
Isuzu 3% of the Total MSRP
Jaguar No Holdback
Jeep 3% of the Total MSRP
Kia 3% of the Base Invoice
Land Rover No Holdback
Lexus 2% of the Base MSRP
Lincoln 2% of the Total MSRP + additional 2.5% rebate of Total Invoice to
Certified Dealers for 2001 models
Mazda 2% of the Base MSRP
Mercedes-Benz 3% of the Total MSRP
Mercury 3% of the Total MSRP
Mitsubishi 2% of the Base MSRP
Nissan 2% + 1% of the Total Invoice (holdback + floorplanning allowance)
Oldsmobile 3% of the Total MSRP
Plymouth 3% of the Total MSRP
Pontiac 3% of the Total MSRP
Porsche No Holdback
Saab 2.2% of the Base MSRP
Saturn 3% of the Total MSRP. But with one-price sales, this is a moot point.
The customer pays MSRP.
Subaru 3% of the Total MSRP (Amount may differ in Northeastern U.S.)
Suzuki 3% of the Base MSRP (holdback) + an additional 1% (floorplanning
allowance)
Toyota 2% of the Base MSRP (Amount may differ in Southern U.S.)
Volkswagen 2% of the Base MSRP
Volvo 1% of the Base MSRP

* Incentives and rebates are actually deducted from the transaction price
after Uncle Sam has collected taxes. We have taken editorial license with the
process in this example for the sake of keeping it simple.

In addition, many dealers use the holdback money to cover other expenses at
their dealership so that even if the car is sold the day it comes off the
truck they still have plans for this money elsewhere.

Should I buy or lease?

Each has its advantages and disadvantages.

Traditional financing offers the pride of ownership, no mileage restrictions,
the freedom to customize your car without worry and it gives you the
opportunity to pay the car off and not have car payments. The disadvantages
are having to pay all of the sales tax upfront, having to usually put a
substantial amount of money down, higher monthly payments, and the possibility
of having repair costs and a car payment at the same time (if the loan term
goes past the warranty period).

Leasing offers the advantages of lower monthly payments, little or no money
out of pocket, driving a new car more often, never having repair bills
(assuming you lease only as long as the warranty period), only paying sales
tax on the portion of the car you use and not having to worry about selling or
trading in the car at the end. The disadvantages are mileage restrictions,
limitations of the amount of customizing you can do, never ending string of
car payments, having to keep the car in good shape and never actually owning
the car.

Which one is better is really determined by your lifestyle, needs, desires and
finances. Generally speaking, a 36-48 month lease term will offer a lower
monthly payment that a 60 month loan (with less than 20% down).

How do I calculate a lease?

Calculating a lease payment is not difficult, once you have all the
information you need. The lease payment is based on the difference between
what you pay for the car and what the car will be worth at the end of the
lease, plus interest.

When it comes to leasing, here is the lingo:

Capitalized Cost - This is the selling price of the vehicle.

Capitalized Cost Reduction - This is simply a down payment.

Residual Value - This is what the car will be worth at the end of the lease
(usually stated as a percentage of the MSRP).

Money Factor - This is the interest rate. It is always give as a decimal
figure. While it is not necessary to know the actual percentage rate when
calculating the lease, you can figure it out by multiplying the money factor *
2400. This number is used no matter what the term of the lease. For example, a
money factor of .0025 would be an interest rate of 6%.

Inception Money (or Get In Money) - This is the amount of money that you have
to come up with at the start of the lease (not including any Capitalized Cost
Reduction). The inception money usually consists of the first month's payment,
a security deposit (usually equal to one month's payment rounded to the
nearest $25 and a bank fee. It can also include the dealer documentation fee,
tags and sales tax on the any Capitalized Cost Reduction (more on that later.)
It is important to have all of these costs broken down so you know exactly
what is being covered.

Now, here is how we calculate a lease. First off, you need to have several
things: the MSRP (or sticker price), the selling price (Capitalized Cost), the
residual value (as a percentage) and the money factor.

Let's use the GTI 1.8T as an example. Adding in the 17" wheels, luxury and
leather packages, it will have an MSRP of $22,000. The residual value for a
36-month lease (with 15K miles/year) is 57%. Usually a 12K mile/year lease
will have a residual value 2% higher (or 59% in this case). The money factor
for 36 months is .00250. Now that we have our figures, we can calculate the
lease. This may seem complicated, but take it step by step and it is quite
easy.

First we calculate the lease cost. Take the MSRP ($22,000) and multiply it by
the residual value (59%). This gives us $12,980. Now, take the Capitalized
Cost (what you pay for the car) and subtract the residual value from it. Let's
say we pay $21,500 for this car. $21,500 - $12,980 = $8520. Now, we take that
$8520 and divide it by the lease term of 36 months. $8520 / 36 = $236.67.

If you didn't have to pay any interest, this is what your monthly payment
would be . Unfortunately, few banks lend money without charging interest . To
figure out the monthly interest you take the sales price ($21,500) and add it
to the residual value ($12,980) and multiply it by the money factor (.0025).
$21,500 + $12,980 = $34,480. $34,480 * .0025 = $86.20. So, you are paying
$86.20/month in interest. You add that to the monthly lease cost of $236.67
and you end up with a monthly payment of $322.87. But wait, there's more. Your
state needs to collect their part of the deal in the form of sales tax. If
your sales tax is 8.25%, you would multiply the monthly payment by 1.0825 for
a grand total of $349.51. This is your monthly payment.

Now, what about putting more money down in the form of a capitalized cost
reduction. You would simply deduct this amount from the capitalized cost
before you run the numbers. For example, if you put $1,000 down, your monthly
payment would drop to $316.73. Now you are probably asking yourself, why not
put more money down? First off, you have to pay your 8.25% sales tax on that
$1000. But that is no big deal. The bigger problem is that if the car ever
gets stolen or totaled, the insurance will pay off your lease, but you will
never see that $1,000 again since it was paid up front. Also, think of it this
way. If you were leasing an apartment and the rent was $750/mo, but the
landlord said, "Give me an extra couple of thousand up front and I will lower
the rent to $650/mo." Few of us would actually do that. Leasing your car is
just like renting. If you can't afford the payment without putting more money
down, I would suggest taking the money you would put down and put it in the
bank to earn interest and then deduct an amount every month to cover the
difference.

I know this seems complicated, so I created an Excel spread sheet that
calculates everything. All you need to do is punch in the numbers. If anyone
wants it, just send me an e-mail at schapiro_scott@yahoo.com.

One more bit of advice. Never lease a car for a longer term than the
manufacturer's warranty. If you do and something breaks past the warranty
period, it will be your responsibility to get it fixed and pay for it
yourself. Since you will give the car back at the end of the lease, you are
basically paying to fix someone else's car. So while generally longer lease
terms will give you lower payments, don't lease past the warranty period.
Also, don't lease longer than you will think you will want your car. Breaking
a lease early can be very expensive.

What is my car worth?

Whether trading your car into a dealer or selling it privately, getting rid of
your car can often create major headaches. This stems from the fact that we
often feel our car is something special so it should be worth more than just
the average car. In reality, your car is only worth what someone else is
willing to pay for it, and this amount is usually lower (in some cases, much
lower) than what we desire. There are, however, resources that can assist you
in determining what is a fair price for your car. These include Edmunds.com,
the Kelly Blue Book (kbb.com), the NADA (National Automotive Dealer
Association) Guide (NADAguides.com) and the Black Book " TARGET="_blank">http://ads.cars.com/adentry/pricing/choose_mym.jhtml?referer=standalone>
.

If you are trading your car into a dealer, you can estimate what a fair
trade-in value would be by looking up your car in one of these guides. There
are, however, a couple of pitfalls to deal with. First, most dealers in a
given region will only use one source to value trades. You must find out what
source they use and look up your car in that source. Second, most dealers will
not offer more than average (or the equivalent) condition for your car, even
if your car is in great shape. Finally, what a dealer offers for your trade
often depends on whether or not the dealer plans to keep the car on their lot
in order to re-sell the car, or whether to send the car to the wholesale
auction.

If you are selling your car privately, you should average the values from the
various sites and use this as a starting point. You will usually get more for
you car if you sell it privately, but you must also deal with having strangers
drive your car and working out the payment and timing. For most people, this
is usually too much of a hassle. In addition, while trading in your car will
usually net you a smaller amount than selling it privately, you will get a
sales tax advantage if you trade your car in. This is because the trade-in
value of your car is deducted from the selling price of the new car before the
sales tax is calculated.

[Modified by VeeDubDriver, 3:10 PM 4-2-2002]


[Modified by VeeDubDriver, 9:55 AM 5-7-2002]

[David@vwvortex]

Giving credit where credit is due... Thanks for VeeDubDriver for putting this together... very insightful info in there...

[VeeDubDriver]

Thanks for posting it for me

[Double-V]

Does the holdback info apply to Canada too?

[VeeDubDriver]

No, the holdback info is for the US only.

[vinny911]

Thank for the tips...it will make my negotiations tip to my side (i hope)...

[VeeDubDriver]

[landrumdh]

nice FAQ but egads please fix the links they totally destroy the fulidity of the thing!!

[Henry]

bump

[Andrman]

How about some used car purchasing assistance and advice? Like what to look for, is it smart to travel to find a rare car, etc?

[VeeDubDriver]

Used cars are a real crap shoot and there is very little "applies to all" advice I personally can give. I would say that have any used car looked at by both a mechanic and a body shop and get a CarFax check done.

[inurb]

Great Info Guys
Here is another great source
www.carbuyingtips.com

[VeeDubDriver]

I have read that extensively, unfortunately, I think some of his information and tactics are a bit dated.

[inurb]

Some of his stuff can be a bit rough, but It's still a great source of info. I learned a whole lot from that site. Cash Flow Shell Games, Bait & Switch, Payment Padding.
You guys did a great job with your own car buying tips section.
You get a big from me

[VW Jetta GLS]

carsdirect.com has not been competitive for years. You can get that price by just walking into the dealership and standing around...

It seems to me that Edmunds does not include advertising, port prep and floorplan fees which run around $280 for VWs. Just one more thing to keep your eyes open for. Also, there is the ever-popular processing fee (can be around $180-$230).

[VeeDubDriver]

Edmunds states that there are always legitimate advertising and other fees that they do not include because they vary from region to region.

Carsdirect.com is usually competitive, depending on the model and region. Like I said, it should be used as just another bargaining tool.

[AutobahnTDI]

Sorry if I missed this in the FAQ, but does TMV include tax?

[VeeDubDriver]

No, TMV does not include sales tax since rates vary from state to state. The amount of sales tax paid can also be affected by trade-in value.

[hotsoup]

VDD, correct me if i'm wrong. TMV should be the targer price when we negotiate. However, seems like TMV on brand new cars are always under invoice. How likely is it to get a brand new ride at TMV?

[VeeDubDriver]

TMV is simply a target price that indicates a fair price for both you and the dealer. It is by no means the lowest possible selling price. As for TMV prices being below invoice, I am not sure which cars you are looking at, but right now many makes and models have extra cash incentives on them. This will allow dealers to sell a car below what the factory invoice states, as I am sure you know. Even popular cars like the Honda Accord have over $1000 in incentives on them.

[hotsoup]

Is there any factory incentives on GTI 1.8T? I think there might have been some for Jetta 'cos I've been seeing specials on Jetta, i.e. cheap lease and stuff.

[VeeDubDriver]

Right now, there is $1200 dealer cash on all '02 VW's (except the 337). However, you will not be able to get the special finance or lease rates with this rebate.

[AutobahnTDI]

how accurate are the invoice prices on Edmunds? are those from the manufacturer or an estimate?

[VeeDubDriver]

The are 100% accurate, but, in the case of VW, they do not include the port prep and floorplan reserve fees that are charged to the dealer and are legitimate additions to the invoice price.

[haunted reality]

quote:

---

Just one more thing to keep your eyes open for. Also, there is the ever-popular processing fee (can be around $180-$230).

---

I want to try and fight this time around, but I hear it can be difficult. The dealer here charges $289.30 last time I bought a VW from them. I am out of state now and plan to do my own paperwork and paying sales tax, registration, etc. I want to try and not pay this if possible.

[vwguild]

Well, you have been busy today!!! What an effort...talk about the old college try...

Only correction is the Incentive Money...It is just that, it is not a rebate, it does
not go to the customer, and therefore is not taxable to the customer...In addition, it is $1250; not $1200...

Again, Great Job

[GeoffD]

quote:

---

I want to try and fight this time around, but I hear it can be difficult. The dealer here charges $289.30 last time I bought a VW from them.

---

Where I live, that "fee" is 100% negotiable. If they try to press the point, get up from your chair, say "No thank-you", and start walking towards the door. No dealer will let you walk out of the showroom if you refuse to pay it. In New England, the paperwork burden is 10 minutes with a typewriter to fill out a form. That costs them less than filling the tank with gasoline.