New car buyers traditionally fall into one of two camps: Educated buyers who enjoy spending hours perusing websites and magazines pondering features and options and those simply resigned to purchasing a new vehicle.
In both instances, the process of making the deal can be confusing and the paperwork overwhelming— the finalized contract is legally binding. Therefore, taking the time to thoroughly review and understand all the fees and line items on the contract is essential to avoid paying for unwanted features, dealer add-ons and unexplained markups.
Understanding Fees and Dealer Markups
Most consumers are familiar with the four essential financial components of a vehicle purchase: the vehicle’s agreed-upon cost, state sales tax, state registration fee and the documentation fee.
The agreed-upon price of the vehicle should reflect the vehicle as delivered, including any additional features, options or services the buyer specifies or agrees to and a standard itemized destination or delivery fee. Automakers and dealers are required to break out the destination fee separately, though it may be buried in the fine print. Currently, most automakers’ destination fees fall between $1,000 and $2,000.
The sales tax and vehicle registration are set costs, but double-check that the dealer calculated them correctly per your state regulations. The sales tax is dictated by state and local municipalities and usually falls somewhere between 6 and 10%. The registration includes assigning the title and license plates.
The documentation fee, or “doc fee,” as dealers often abbreviate it, is a bit more nebulous. Ostensibly utilized for processing and filing all the pertinent documents—sales contract, registration and title—it’s also an opportunity for the dealer to eke out a few more dollars over the actual cost of filing the documents.
For this reason, some states put a limit on the “doc fee.” Michigan, for instance, limits it to $210, or 5% of the sale price, whichever is less. California limits it to a flat $80; New Jersey and Connecticut have no limit. Wherever you reside, check your state’s policy and compare it to the fee on the contract before finalizing the deal.
The practice of adding fees at the dealer level is not new, but the approach has changed. Traditionally, shoppers were far less informed, and arriving at the dealer having only broadly researched a topic like hybrid SUVs they were unprepared to find items including “dealer prep,” “shipping,” or even abbreviations that represent tenuous items like a final wash and cleaning added to the bottom line without their prior consent.
Today, pricing information is readily available to consumers. In turn, dealers have become brazen, adding a dealer-prepared addendum or supplemental sticker itemizing options, services or accessories to the vehicle. These typically include easily-marked-up items, including fabric protection (Scotchguard fabric spray or equivalent), clear coat protection (wax), nitrogen tire inflation, floor mats and roof racks—the list is virtually limitless.
While none of these items are necessarily detrimental, if they were added on after arriving at an agreed-on price, refrain from signing the contract and ask the dealer to remove the items or fees. A gentle reminder that you can still walk at this point is helpful. This is another example of the importance of not signing anything until the details are set in stone.
Dealer financing can further blur the numbers, especially for first-time buyers or shoppers with compromised credit. The large majority of dealers with “in-house” financing essentially operate as sales agents for a network of banks and finance companies with which they have relationships.
In addition to any commission they may earn for originating the loan, they often attempt to work in additional profit by adding a tiny percentage, sometimes as small as 0.25%, to the loan’s interest rate.
Dealers generally try to get you to focus on the monthly payment instead of the big picture. Ensure the federal truth-in-lending disclosure is part of the paperwork as it details the interest rate and the total number of payments.
Things can get more complicated if you’re trading in a vehicle or financing through the dealership. Intentionally or not, a dealer could undervalue your trade-in on the contract after earlier giving you a number in casual conversation. Make sure to approve the value of your trade-in in writing, and confirm the same number appears on the contract.
Most people financing a new vehicle will find that the finance company requires them to carry a full coverage policy. The policy must meet the state-mandated required minimum amount for liability, collision and comprehensive incidents. It can get quite expensive for young drivers, those with a bad driving record or high-end luxury and high-performance models. To get a rough estimate of your potential insurance expenses simply make use of a car insurance calculator.
Supply and Demand in the Modern Age
For the first time in decades, demand for new and used vehicles is outstripping demand. As a result, popular models like the new Ford Bronco and Maverick, Chevrolet Corvette and Jeep Wrangler are often marked up 10 and even 20% above the sticker MSRP with dealers calling it a “market adjustment.” The only way to avoid such markups right now is to shop around.
When it comes time to sign, review the documents a second or third time and check everything for accuracy, including the spelling of your name and personal information. Make certain the VIN (Vehicle Identification Number) on the document matches the one on the paperwork.
The sales manager will likely take one last shot at adding fees in the form of an extended warranty, service contract or other supplemental services, most of which can be purchased at a later date from outside sources. Don’t be afraid to stick to your guns on what you agreed to, a good deal for you is one done on your terms.