Sky-high dealer markups are increasingly common in today's car market. Here's how you can outsmart dealerships and get the best deal.
Buying a new car can be a complicated and time-consuming process. After spending hours researching the perfect model and trim of your new car, the next step - visiting a dealership and negotiating for the best deal - can seem daunting, especially if you have little or no experience with approaching car dealerships.
One part of the purchase journey that leaves many prospective buyers stumped is dealer markups: car dealerships are allowed to charge customers above MSRP (manufacturer's suggested retail price) depending on factors such as so-called market adjustments (a combination of high demand and low inventory for a specific model, which leads to inflated prices).
Dealers are currently charging an average markup of $4,000, with peaks of up to $12,000 (the Genesis GV70 is currently on top of the list, with an average markup of 27.5%), but we've seen individual cars with even crazier markups, like a $90k markup on the new Nissan Z Nismo, or one dealer attempt to sell a Dodge Demon 170 for supercar money.
With dealers trying to shaft customers, learning how to avoid dealer markups is a crucial skill that can help you save thousands of dollars when buying your new car.
Dealer markup is a fee that car dealers charge on top of a new vehicle's MSRP. This can come in the form of "market adjustment fees" or additional, often vaguely defined, fees the dealer tacks onto the final price to boost their profit margin.
High dealer markups are becoming more and more of an issue in today's market thanks to a combination of factors, such as the aftershocks of the chip shortage and supply chain disruptions that affected car manufacturers during the pandemic, high inflation and the slowing down of consumer spending due to the increased cost of living. Dwindling supply from the recent UAW strike also threatens the market with an increase in dealer markups on popular models whose production was affected by the strike, creating a car shortage for in-demand models.
The end result is high new car prices and a seller's market where dealers have the power to charge very high market adjustment fees that can run up to thousands of dollars.
Yes, dealer markups are legal; car manufacturers allow dealers to set their own car prices depending on local demand. It is also legal for dealers to use a variety of shady techniques to boost their profits, from obscuring their prices to adding on small-print dealer fees and unwanted accessories, so beware. It's not uncommon to find a dealer demanding top dollar for a limited edition car, and there's nothing legally wrong with this, but if you encounter dealers doing so, remember that it's your money; you're in charge and no one can force you to spend more than you're comfortable with.
Yes, absolutely! Negotiation is a crucial part of the purchase process for new cars, and there are a few ways you can outsmart even the sneakiest auto dealers and get the car you want at a fair price. Remember, even the fairest dealers will use this technique to try and get a few thousand dollars more out of a prospective buyer, so make sure you are well informed and prepared when you walk into the dealership to buy a new car.
Here are a few ways for you to avoid new car markup and drive away with the best deal possible:
Before setting foot in the dealership, ensure you are equipped with as much information as possible. Once you have chosen the make and model of your new vehicle, start focusing your research on the financial aspect: find out what the car's MSRP is, and if you can, try and find out the invoice price as well (the invoice price is what the dealership pays the manufacturer). These two numbers will give you a target range for your negotiations: ideally, the final price of your new car should fall somewhere in between to give you the best possible deal.
This is a good time to think about options and accessories as well: adding options and accessory packs will impact the final transaction price. If there are any specific accessories you can't go without, make sure you factor them into your calculations.
Research all nearby dealerships to compare prices and offers; sometimes, traveling further out is worth it to get a fair deal, so expand your search area as far as you can to include the maximum number of dealerships possible. You can even look at buying a car from a neighboring state, as it may sometimes be cheaper to fly an hour to get the car you want for much less.
It might not always be possible to drive away with your dream car, especially if you have time constraints (such as needing a vehicle immediately to get to work) or budget constraints. Dealer markups are another factor that may make it impossible for you to get the exact car you want: sometimes, the best deal comes with a different vehicle than the one you originally had your heart set on. The best course of action is to stay flexible in your choice of model and build your shortlist around the current new vehicle inventory available at your local dealerships.
Suppose time is not an issue, and you can wait a little longer. It might be worth waiting a few weeks or months for the most appropriate time to buy, such as the end of the year when dealers scramble to meet sales targets or just before the release of new models around springtime, as dealers try to shift old inventory.
This might limit your choice to whichever cars are still available, so you probably won't get the exact vehicle you originally wanted, but it will help you get a better price as dealers will be more willing to negotiate.
Many dealers will try and pressure you to agree to a deal during your first visit to the dealership; if you have a choice of multiple dealers in your area, don't be afraid to walk away (even if the dealership insists you won't get the best deal if you don't sign immediately), and visit several dealerships before making your final decision. This will help you get a good idea of what's currently on offer and provide you with valuable information on prices and offers that you can use to make a decision at home before making another trip to the dealership.
This is where the research you did at the start of the process will come in handy: having a good idea of what the car's price is supposed to be will give you an advantage over the dealer and allow you to be firm in how much you're willing to pay.
The same principle applies in reverse to negotiating trade-in value if you are planning to trade in your old car: make sure you have as good an estimate as possible of what your current car's trade-in value is so you can use that figure as a reference point for negotiations to get as much as you can.
It is not uncommon for new cars to come with dealer-added accessories and extras; this is another way to create additional dealer profit you need to watch out for.
Think about what accessories, if any, you need for your car to suit your lifestyle, and don't let the dealer pressure you into letting them install other accessories you don't need. If you do change your mind later on, you can always buy accessories and have them installed, often from the manufacturer itself, for a better price.
Nitrogen-filled tires are one extra cost to watch out for: dealers will often try to offer them to customers when purchasing a new car as a cheap way to boost their profits. With no concrete benefits (tests have shown filling tires with nitrogen does not provide any advantage in terms of performance or economy), this is definitely an add-on best skipped.
The same goes for door edge guards, which often come with sky-high price tags at the dealer but can be picked up as an aftermarket accessory for as little as $10.
Make sure you also evaluate whether other extras, like extended warranties, are worth it depending on your individual situation: get a written document showing the total price and a list of all fees, accessories, and extras added by the dealership so you can spot any hidden costs before you sign the dotted line.
With any luck, you'll never encounter a shady dealer trying to make a quick buck off of you, but this is unlikely to be the case. But by knowing your rights, you stand a better chance of not .