One of the great mysteries of buying a vehicle is this: How much does a car dealer mark up a car?
That’s a great question. But the one we should be asking is, how much profit is the dealer making on a particular car? That is, how much wiggle room is there to negotiate? How do you know you’re getting a good deal on your new car?
If you are looking for a definitive answer here, we are sorry to disappoint you. There is no way to know exactly how much room there is between what a vehicle costs a dealer and the manufacturer’s suggested retail price (MSRP) on the window sticker.
We can ballpark it. But simply put, factors exist that we do not know. However, we can provide information so you can develop a serious negotiating strategy.
What is Car Invoice Price?
If a new car sits on a dealer’s lot, it got purchased from the factory. The factory got paid for that car before the dealer added it to the inventory one way or another. What the dealer pays for that car is its invoice price. Factory invoice, car invoice, and dealer invoice get used somewhat interchangeably.
While there could be high-volume dealers who might get a price break upfront on car invoice prices, the invoice price is typically universal among dealers for car models. It’s a fixed amount. When a dealer advertises a price as below invoice, the stated factory price is that invoice. More on this later.
What is Dealer Markup?
Car dealer markup is what dealerships add to jack up the price of a car. It’s above and beyond the factory MSRP.
A dealership makes its gross profit on a vehicle from the spread between what it must pay the factory for a car and the amount it collects from a customer at the point of sale. Once a dealership subtracts expenses, such as the salesperson’s commission and so forth, that’s their net profit on the vehicle.
There’s your wiggle room for negotiations on that new car.
Car dealer markup gets clearly stated on the window sticker or Monroney label, and it’s all gravy. While a car dealership may only be making a slim profit on each car it sells, it’s probably doing just fine. Most dealership profit is generated behind the showroom and on the used car lot.
Besides having you sign all the paperwork to close your deal, the finance manager will offer to sell you extras like extended warranties, gap insurance, and upholstery protection. Be wary of such additions. Most people do not need these items anyway, including the upholstery protection.
Just ask lots of questions and ask the dealership to remove unwanted extras. The dealership makes a profit on every product the finance manager sells to you, from roof racks to vehicle identification etching. Some dealers charge a document fee for filing the paperwork on such things as a car title. However, shouldn’t the purchase price cover costs such as the doc fee? Consumers often think so because dealerships make a profit on each car they sell. And yet, dealers often add it anyway, and it’s legal.
Bottom line: It doesn’t hurt to ask questions and negotiate on any unreasonable fee.
So that you know, the service and parts departments also are big moneymakers. Whenever a service worker calls you later in the day to report the car you dropped off is ready, but you need new belts or tires, that’s all going to bring more cash into the dealership.
Many parts departments operate a retail desk for consumers but often sell parts to third-party garages and body shops. When a vehicle with some car dealer’s logo splashed across it drives past, it’s likely to be a parts vehicle on its way to deliver a garage’s order. Cha-ching.
What is the Average Markup on New Cars?
Let’s face it; buying a new car gets expensive. Average transaction prices for vehicles, SUVs, and pickup trucks reached $46,526 in April 2022. According to data from Cox Automotive, Autotrader’s parent company, that’s $186 higher than in March and $5,354 more than April 2021.
The data also show that car buyers nowadays pay more than the sticker price for vehicles. For example, the April data also show car buyers of non-luxury vehicles paid an average of $862 above the MSRP price, and luxury buyers paid $1,865 more than the amount on the sticker.
That compares with April 2021, when vehicle buyers paid an average of $1,850 less than the MSRP.
Ask the dealership to run the estimates for your monthly payment, interest rate, destination fees, and dealer fees. If you’re still browsing or don’t want to start negotiating on the car just yet, you can use our monthly payment tool to plug in interest rate, taxes, and any trade-in value to get a better idea of what you’ll pay. You can find the destination fees on the vehicle’s window sticker or on the manufacturer’s website for the make and model you want to purchase.
If you find a vehicle from a new or used listing on Autotrader, many of them include the monthly payment you can expect for the specific vehicle.
Then, all you need to calculate is the dealer fees. That’s where pricing gets more complicated.
What is the Average Markup on Used Cars?
Here again, we don’t know exactly the car dealer markup on used cars. However, used vehicles bring a significant revenue stream for most new car dealerships. You can go to a site like Kelley Blue Book, our sister company, and see the book value (average value) of a used car based on various factors, such as condition, trim level, options, and more. You can see the average value as a trade-in and a direct, party-to-party sale.
The dealer paid to acquire that car somewhere around those two numbers. It’s a way to ballpark what the dealer invested in the used car.
Other factors may impact a used car’s value. For example, if the car’s owner(s) crashed the vehicle, its value would decrease. If the owner kept up with car maintenance, its value would increase, and so on. AutoCheck and Carfax reports will let you know a car’s history. If it’s certified pre-owned, the dealer (and the brand) makes a more significant investment in a vehicle.
Some dealerships look at what they paid for a used car and tack on a dollar figure, like $1,500, $2,000, or whatever, to that purchase cost. Others get more scientific, calculating the local or regional average transaction price for a vehicle’s year, make, and model, and use computer models to assist.
What is MSRP, and How to Use It?
MSRP, or manufacturer’s suggested retail price, is a factory-set price. The car dealer doesn’t have anything to do with it. Because of automotive franchise laws, the dealer is free to sell the car for more or less than the MSRP. But the MSRP is the amount at which the automaker would like to see that car sold.
As a consumer, it’s the number you want to whittle down when you can. The only issue is that the chip shortage is among the many reasons for the tight inventory of vehicles. So, instead of buyers being able to negotiate the price below MSRP, many are finding the window stickers show markups. Some dealers call it “market adjustment” costs. Some will list them as dealership fees. Those two are the dollar amounts to negotiate down. Yes, vehicles remain in short supply. But you can refuse to pay those and pit one dealer’s price against another’s to get the best deal.
RELATED STORIES: Tips for Buying a Car During the Chip Shortage
The automaker’s only real interest in the amount a car dealer charges for its car is establishing a consistent sense of value for its products. That’s not important to sustain demand but to motivate lenders to finance the brand’s products. Moreover, it’s in the automaker’s best interest to remain fiscally sound for its dealers.
Now for a bit of history. We know what the MSRP of a new car is because, in the late 1950s, the government mandated that every new vehicle display the MSRP and other vital information on a sticker affixed to the windshield. Named for a sponsor of the Automobile Information Disclosure Act, Oklahoma Sen. Mike Monroney, the window sticker provides car buyers with a wealth of information about the vehicle.
What is Dealer Cost vs. Invoice Price?
Here’s where things become seriously murky. Whatever amount you get paid by your employer each month isn’t all yours to keep, right?
As frugal as you might be, that entire amount doesn’t go into savings. You need to pay your monthly expenses like rent or a mortgage, utility payments, a car payment, insurance, and perhaps a kid in college, and so forth.
As mentioned above, the dealer cost is also the factory invoice. It’s also sometimes called the car invoice price. These terms get used interchangeably.
What Increases Dealer Cost?
Affecting a dealer’s actual net profit on a car are all manner of expenses. We’ve already mentioned the salesperson’s commission. Although specific other staff, like the finance-and-insurance (F&I) managers, work, at least in part on commission, plenty of dealer staff don’t.
Other expenses include everything from utilities and taxes to that floppy air sculpture waving its arms in front of the dealership. The dealer borrows the money to pay the factory for that new car you want to buy and pays interest on that loan. All of that takes a bite out of the profit margin on a car sale.
What Lowers Dealer Cost?
On the other hand, the car dealer invoice is often not what they pay the factory for the vehicle. To lure buyers, carmakers offer incentives, like zero down payment, financing with low interest rates, and cash rebates. They do the same to dealers to entice them to buy more inventory and motivate them to sell more cars.
Carmakers employ several schemes to lower the dealer invoice cost after selling the car. Sometimes it’s a dealer holdback, which is a set kickback the factory pays the dealer once the vehicle gets sold.
Automakers also return money to dealers in the form of monthly sales-goal bonuses. You can often get a better deal on a new car at the end of the month. If a dealership is close to hitting its monthly goal, it may sell you a car for less because it may mean tens of thousands of dollars in bonus money.
What to Pay: How to Determine the Right Price
Given the wild variations between invoice and retail pricing — and now markups — you might be wondering what a car is worth and what you should pay when buying a car. It’s tricky enough, but Kelley Blue Book helps with suggested purchase price numbers.
The way it works is relatively simple. Enter the parameters of the vehicle you’re considering — model year, options, engine choice, transmission — and Kelley Blue Book brings up a suggested purchase price based on several factors, including the car’s popularity and the spread between base and invoice price.
RELATED STORIES: How to Sell Your Car
You might pay a little less than the Kelley Blue Book price or pay a bit more, but it’s a relatively accurate representation of where you should expect to be.
Unless a vehicle is in high demand, there is room for negotiating on new cars.
Typically, the more expensive the vehicle, the bigger the spread between the dealer invoice and the MSRP. Full-size pickups like Ford F-150 and Ram 1500 are among the cars with the bigger spreads, generating a healthy profit. Small entry-level sedans like Hyundai Accent or Nissan Versa have very slim profit margins.
It’s wise to do the research and hatch a negotiating plan ahead of your car dealership visit. You can’t know all the numbers. But armed with the difference between the dealer invoice and MSRP, you have a spread within which you can negotiate.
The MSRP is the dealer’s goal and its high-end offer in most situations. That is when no inventory shortages and markups are happening. Your goal is to pay as little over the dealer invoice as possible. That amount, or even a little below the dealer invoice, should be your beginning offer. But be reasonable. You will pay more.
How much more depends on how willing you are to bargain and walk away if the dealership doesn’t budge. You can find the MSRP on the new car’s window sticker you are interested in.
On used cars, dealers tend to make more profit per sale than new ones. So, be aware of the car’s book value before attempting to negotiate. As with a new car, the sticker price is where the dealer begins negotiating. Where you start negotiating is the book value or a little below.
Don’t be afraid to fiercely negotiate because a dealer typically has more wiggle room selling a used car than a new one. Remember, despite markups, the dealership wants to sell you that car as much or more than you want to buy it. Find common ground.
- Monthly payment: Before buying a new automobile, calculate your monthly payment to ensure it’s affordable. Use this tool to help you calculate how much you can afford, and this one estimates your monthly car payment.
- Interest rate: It’s usually best to discuss the bottom line car price with the dealership before discussing payment options and car loan terms. However, buying a car online allows you to start with the monthly payment. You can also shop for your interest rate online with the dealership, other banks, and credit unions, including Autotrader listings. You can always check manufacturer interest rates for incentives and compare them to your bank’s interest rates ahead of time. What if you want to pay in cash? Weigh your options first. Sometimes the better deal comes by way of financing.
- Destination fees: Freight charges or destination fees range from about $900 to $1,700. Check the window sticker on the car you want to buy while at the dealership to know for sure. Check the manufacturer’s website and research the vehicle make and model you’re interested in to determine the exact cost before heading to any dealership.
- Insurance costs: Before buying a new car, consider your insurance costs. Check with your current insurer using the vehicle identification or VIN of the vehicle you’re interested in. Dealers will try to sell you gap insurance, but it’s usually more expensive than obtaining insurance independently. So do your homework before completing any deal.
Considerations Before Buying a Used Car
- Vehicle history report: You’ll want to check the vehicle’s history to determine whether it was in any accidents, the number of past owners, and the car’s service history. Dealerships typically offer a free vehicle history report from services such as AutoCheck or Carfax. You can also check the vehicle history report yourself.
Read Related Content: 5 Things To Do On a Used Car Test Drive
- Extended warranties: Many used cars from a dealership come with an extended warranty. They’re also going to upsell you another extended warranty option. Check closely and read the fine print. If the vehicle is a year or two old, it’s probably unnecessary. For luxury vehicles, it’s often cheaper to buy an extended warranty because of the cost of parts and labor.
- Certified pre-owned: When you buy a certified pre-owned car, the vehicle has passed rigorous inspections and is in excellent condition. Read more about CPO cars.
- Buying a Car: Why Isn’t the MSRP Also the Final Price?
- Financing a Car: Are Taxes and Fees Included in Financing?
- What is MSRP? What It Means and How to Use It
Editor’s Note: This article has been updated for accuracy since it was originally published.