Making sense of car dealer costs: a car terms glossary

Car manufacturers and dealers purposely hide their cost structure from the general public.  Their intent is to make it difficult for average folks to evaluate a car purchase.  The car industry makes more money if you can’t determine what is a fair deal.

To help shed some light on the subject, here is a car terms glossary that breaks down common car terms and how they should be interpreted.
Car Terms

Car Price TermDescriptionNegotiable?
MSRP (Manufacturer's Suggested Retail Price)This is the "sticker" price required by law to be shown in the window of a new car. The manufacturer decides a retail price for each model (base MSRP) and then adds on the retail price for each option. The dealer is free to charge more or less than this recommendation from the manufacturer, but MSRP is a useful guideline for both you to evaluate comparably equipped cars to each other. No need. Each dealer will set their own price and give you a quote using this as a guideline.
Invoice PriceThe price paid by a car dealer to the manufacturer for each car. This price is the same for every dealer across the U.S. However, this is not always the bottom line. There are rebates and incentives to both consumers and dealers that occasionally allow you to buy a car below invoice price.No need. This is the price to the dealer, not you.
Your Target PriceAn arbitrary number we use to give you a goal to shoot for. Never mention this number to a dealer since you do not want this to be the lowest you can go. A common formula is invoice price + 2%, but this does not factor in car popularity or current promotions. Edmunds TMV® is a good source to set a target based on market conditions and current deals people are getting. No need, this is a guideline for your own benefit. In some cases it is possible to buy below invoice, so again, never mention your target price.
Quoted Dealer PriceThe price you are quoted from the dealer. Since most dealers will not include taxes, tag, or title in their quotes, it’s easiest to use this price to do your comparisons even though it is not the final “out the door” price.Yes.
Out the Door PriceThe final dealer quote including all options plus taxes, tag, or title.Yes.
Destination FeesThe amount charged by the manufacturer to send the car to each dealership. It is the same for a specific model regardless of the dealer's location.No. Dealers usually pass this fee along to customers directly and it is rarely negotiable.
Dealer HoldbackUsually a small percentage (2%-3%) of MSRP that is returned to a dealer once a car is sold. This money is typically used to help dealers pay for finance charges they have accrued while keeping unsold cars on their lot. Keep in mind this is a "refund" of money to the dealer for what they originally paid to buy the car from the manufacturer. Usually not. Since it is basically the dealer's own money, they are often not thrilled with the idea of passing this money along to the consumer.
Factory-to-Customer (or Manufacturer) RebatesThese rebates come direct from the manufacturer to you. Edmunds can tell you what incentives and rebates are available in your area.No. The dealer has no control to negotiate them since they are direct from the manufacturer.
Dealer IncentivesUnadvertised cash that goes from the manufacturer directly to the dealer to help boost sales of a particular model. Dealer incentives can be more common at the end of a model year to help clear room for newer models. Yes. This extra cash to the dealer gives him flexibility to negotiate.
Documentation, Dealer Prep Fees, and Add-onsThese fees are a big source of margin for dealers. They cover administrative costs but are often much higher than the actual cost incurred by the dealer. Many add-ons such as fabric protection, paint sealant, and VIN etching can be performed yourself with kits from an auto-parts shop.Yes. These fees and add-ons are usually negotiable.
While it’s useful to understand all of these car terms, do not get hung up on specific fees and rebates.   It can be a hassle researching and in the end you’re only playing into the dealer’s shell game.  They shift around fees and rebates into different categories to try to confuse you.    When you negotiate a car price over email, you will ask the dealer to give you a total price that beats their competitors.  In the end, they can shift around fees and incentives all they want, but you only need to be concerned with the bottom line and getting it as low as possible.

Photo by Johnath