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Car Dealer Terminology Explained--Part 1: Buying a New Vehicle

4/10/2013
Car dealers sometimes use words and phrases that the average consumer does not understand, which often puts new-vehicle shoppers at a disadvantage during the car-buying process. To help educate consumers about the car-buying process and related words, phrases, and concepts, this article explains common car dealer terminology and how it impacts negotiation for the new vehicle and the financial transaction. The words and phrases are listed below, in alphabetical order, and are specific to the process of buying or financing a new vehicle.

Dealer Addendum Sticker
A dealer addendum sticker details any dealer-installed accessories, and their prices, that may have been added to a vehicle after its arrival at the dealership. In cases when a model is brand new and in high demand, a dealer addendum sticker may list nothing but additional markup over the Manufacturer's Suggested Retail Price (MSRP). Keep in mind, however, that the price of dealer add-ons can be negotiated.

Dealer Prep Charge
When a new vehicle arrives at a dealership from the factory, dealership personnel must prepare the vehicle for sale. Often, the dealership passes that cost to the consumer through a dealer preparation charge. Sometimes dealer prep charges are reasonable. Sometimes they are not. This, too, is something that can be negotiated.

Doc Fees
Documentation fees are designed to pay for the costs incurred by the car dealer in association with processing paperwork related to a lease or purchase. Similar to dealer prep charges, sometimes these fees are reasonable and sometimes they are not. If you feel the fees are excessive, try to negotiate an amount that is more reasonable.

Extended Warranty
An extended warranty gives a consumer additional warranty protection after a vehicle's original factory warranty expires. Car dealers typically attempt to sell customers an extended warranty at the time a new vehicle is purchased, but consumers often have up to one year after the purchase to decide if they want to take advantage of an extended warranty plan. This, too, is a negotiable price.

F&I
This abbreviation stands for finance and insurance. When buying a new vehicle, consumers are sent to the F&I office to finalize the details of the deal while the dealership prepares the new vehicle for customer delivery. In the F&I office, additional products and services may be offered to the consumer, such as dealer financing, extended warranties, service contracts, insurance, and more. At the end of this process, the purchase contract is finalized and signed, and then the customer drives home in his or her new vehicle.

Gap Insurance
A new vehicle depreciates the minute a consumer signs a contract and drives off the car dealer's lot. That's because it is now a used vehicle rather than a new vehicle. In the first weeks, months, and sometimes years that a consumer is in possession of the vehicle, it may be worth less than what the consumer owes on the car loan, especially if the new vehicle was purchased with no down payment or a small down payment.

If the car is stolen, or damaged beyond repair in an accident, during the period of time that the consumer owes more than the car is worth, there is a gap between what the car insurance company will pay for the vehicle and what the consumer must pay to satisfy the terms of the car loan. Gap insurance is designed to protect the consumer against this difference between actual vehicle value and the balance owed on the loan.

Holdback
Car dealers stock inventory, just like any retail store. Because vehicles are expensive, car dealers must finance inventory through the auto manufacturer using a process known as floorplanning. Car dealers must also advertise their inventory. These activities cost the car dealer money.

Because auto manufacturers rely on car dealers to keep assembly lines running and profits flowing, certain car companies may offer car dealers a "holdback,"--a percentage of either the invoice price or MSRP of a new vehicle that is repaid to the dealer by the manufacturer--each time a new vehicle is sold. The holdback is designed to offset expenses associated with floorplanning and advertising, and is generally not offered to the consumer. If a car dealer turns inventory rapidly, holdback money can help boost profit. If a car dealer turns inventory slowly, holdback simply helps to reduce losses.

Not all car companies offer a holdback to car dealers, preferring to employ other methods to assist their retailers in offsetting certain costs of doing business. Among car companies that do offer a holdback to car dealers, the amounts and programs vary between auto manufacturers, and frequently change. It is very difficult for consumers to determine whether or not a car company offers its dealers holdback money, or, in cases where a holdback program exists, if a particular vehicle is eligible for any holdback money.

Incentive
An incentive is an amount of money that is paid to the car dealer by the car company upon completion of a sale to a consumer. The car dealer may or may not elect to pass all or a portion of the savings on to the customer in order to lower the vehicle's price or payment.

Interest Rate
The interest rate is the amount of interest a consumer pays on a new vehicle loan, expressed as an Annual Percentage Rate (APR). The lower the APR, the better the interest rate. Interest rates are negotiable, so be sure to get the best rate possible when financing a new-car purchase.

Invoice Price
Invoice price refers to the amount of money the car dealer pays the car company for the new vehicle. Generally, the invoice price is higher than what the car dealer actually pays the factory for the new vehicle, after accounting for any incentives, holdback money, or spiffs (defined below).

MSRP
The Manufacturer's Suggested Retail Price (MSRP) is also referred to as the sticker price. Subtract the invoice price from the MSRP to determine the minimum amount of negotiating room the car dealer has with regard to the selling price for the new vehicle. Vehicles in low supply and high demand are likely to command full sticker price, or higher. Other vehicles are expected to sell for a price closer to invoice.

No Haggle Price
In an effort to simplify and bring transparency to the process of buying a new vehicle, some car dealers offer no-haggle pricing, which sets a firm price for a new vehicle in advance. No-haggle prices are designed to give customers discounts while giving car dealers a fair profit and can make buying a new vehicle easier, faster, and less stressful.

Rebate
A rebate is an amount of money paid to a consumer by the car company upon completion of a new-vehicle purchase. Consumers can accept the rebate in cash, or can apply the amount of the rebate to the down payment made on the vehicle by signing the rebate over to the dealership. Remember, consumers must pay taxes on the rebate, which is considered income, regardless of whether he or she accepts the rebate as cash or signs the rebate over to the dealer in lieu of additional cash for the down payment.

Service Contract
Consumers are likely to be offered a service contract when completing paperwork in the F&I office. A service contract is a pre-paid plan to have your new vehicle serviced at the dealership and typically offers a discount compared to the price the consumer might pay for dealer service without a service contract. Many new vehicles come with free scheduled service and maintenance, such as BMW models and Toyota models.

Spiff
A "spiff" is a temporary incentive that is paid to the car dealer or a car salesperson by the car company. For example, in order to inspire improved sales performance during a weekend sales event, the car company might offer the car dealer an extra $200 for every new vehicle sold, or the car salesperson an extra $100 for every new vehicle sold. Spiffs can sometimes give the car dealer extra wiggle room on price, but the amounts are typically too small to make a large difference in terms of the price or monthly payment the consumer will pay.

Trade-in Value
Trade-in value is the amount of money a car dealer is willing to pay a consumer for the consumer's old car. This amount of money is typically less than what a consumer can obtain for the old car by selling it herself or himself via private party. The reason the trade-in value is lower is because the car dealer is taking on any financial risk associated with the old car, including the costs associated with reconditioning the vehicle and preparing it for sale, or transporting the old car to an auction if the car dealer determines it is not right for the dealer's used car lot.

Upside Down
When a consumer is "upside down" on a car loan, he or she owes more money on the vehicle than the vehicle is worth. To avoid becoming upside down on a car loan, consumers should make a larger down payment and choose a model that holds more of its original value over time.

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