Car Invoice Prices

Car dealers, like any other business, need to make money to stay in business. The way car dealers do this is by purchasing vehicles from the factory or manufacturer at one price (wholesale or invoice price) and reselling to consumers at a higher price (retail or MSRP). The difference is their profit.

The car invoice price is set by the factory and is the same for every dealer purchasing vehicles from this manufacturer. In addition to the basic cost of the vehicle, the car’s invoice price includes other dealer costs that are simply passed along to the consumer such as the destination charge. This is simply the cost of shipping the vehicle from the factory to the dealer. Most car-related web sites, like Kelley Blue Book or Edmunds, provide information on both invoice prices and destination fees.

Many consumers don’t realize it, but there is a difference between a car’s invoice price and the actual dealer cost for that car. Dealers are given a holdback amount from the factory. This can be either a percentage of the retail price of a vehicle or a flat fee. 2-3% of the retail price is a typical holdback amount. The purpose of this holdback is to help dealers cover some of their costs in borrowing money to purchase vehicles for their inventory. Dealers, like many of us, borrow money to buy the cars that they have available on their lot. This financing is often done through the factory, and the longer a car sits on a dealer’s lot without selling, the more interest is owed to the lender. More interest paid to the lender for a certain car means a smaller profit for the dealer on that car.

Besides holdback amounts which reduce a dealer’s actual cost, there are also factory-to-dealer incentives. These incentives are occasionally offered by the factory to help dealers move cars off their lots. This, in turn, results in dealers needing to purchase more cars from the factories. The effect on the dealer’s cost is that these factory-to-dealer incentives lower the dealer’s actual cost. These incentives also explain how dealers can sometimes offer prices “below invoice” and still remain profitable. Their retail price may be “below invoice”, but they are still making a profit on the vehicle due to the incentives and the holdback amounts they are receiving from the factory.

How can you use the car invoice price when shopping for a new car? The car invoice price can help you set a reasonable target price. By researching the invoice price for the car you want, adding the destination fee, subtracting the holdback amounts and any factory-to-dealer incentives, you can come pretty close to estimating the dealer’s actual cost for your car. Keep in mind that dealers do need to make a profit, so add a fair percentage (5% is often suggested as a fair profit margin) and use that number as your target price for purchasing your new car.