Choosing a new car

The sales price that you see pasted to the window of a new car is the sticker price, or MSRP — that is, manufacturer’s suggested retail price. That’s the official asking price suggested by the car’s manufacturer. But if you negotiate, the MSRP is usually not the price that you pay. By understanding how the MSRP is determined, you can often save hundreds or thousands of dollars on your new car purchase.

Invoice price

One key number is the car’s invoice price, which is the wholesale price that the dealer officially paid the manufacturer for the vehicle. But in reality, while many dealers acquire cars for the invoice price, they often truly pay less because they may receive money from the manufacturer in the form of dealer holdbacks, dealer rebates or factory-to-dealer incentives. Typically ranging from 1% to 3% of the car’s invoice price, this money compensates the dealer for certain costs associated with selling cars, such as the commissions paid to salespeople, overhead expenses, insurance, etc.

Dealers use the extra money to advertise sales at prices just above invoice cost or "at cost" — giving the impression that they’re practically giving cars away. Actually, they’re still earning profits.

Additional charges

Other costs go into a new car’s price. Almost all automobiles come with a destination charge, which covers the cost of shipping the car to the dealership. You may choose to add certain dealer-installed options, such as an alarm system or a DVD player, which will add to the MSRP. And some car dealers will include various extra fees, such as documentation fees, dealer preparation charges, market value adjustments (MVA) or added dealer profit (ADP), some of which may be added to cars that are in high demand (a practice that manufacturers generally don’t like). These fees, which are negotiable, account for various costs of running a car dealership for which the retailer may then try charge the customers.