Buying a car is stressful. After you’ve spent a couple of hours (or longer) negotiating a price you’re happy with after deeply researching prices of the car you wanted to buy, you’re then sent to the back office to sign the paperwork. Believe it or not, many dealerships actually earn money from the ‘Finance Manager’ who does the paperwork with you than the sales person who actually sells you the car. How do they do this? Well as mentioned above, you spend a ton of time researching car prices, but when the dealer starts stacking up fees and warranties you probably haven’t done your homework on them, so things can get out of hand quick.
Here are the fees and products most commonly added onto a car sale, and what they are, and if you should negotiate them or avoid them all together.
- Registration Fee: This one you’re stuck with. This is a fee that goes straight to the state for your license plate, either to transfer from your old vehicle to your new one, or for a brand new plate. This fee varies greatly by state, but just know the dealer makes no money on this and it can’t be negotiated as they’re required to register the vehicle before you can drive it away.
- Sales Tax: Again, this is non-negotiable since it goes straight to the government based on the purchase price of your new vehicle.
- Documentation Fee: This is a fee charged by the dealership itself, and not a government-mandated cost. Some states do have a limit on how much dealers can charge, but not all do. Most dealers will not negotiate this fee, and may offer a vehicle at an extremely low price knowing they stand to make the money back on this fee (among others) so always demand a full ‘out the door’ price for the vehicle with an itemized breakdown before signing anything since although the dealer may not negotiate this fee, you can demand a discount on the vehicle to make up for it if its excessively high.
- Dealer Fees: Some dealers will call these something that sounds like it came from the factory, like “Shipping” or “Preparation” or some acronym like ‘PDI’. Don’t be fooled, this is a profit maker for the dealer and many dealers will not negotiate it away, but just like the Documentation Fee, you can ask for a greater discount on the vehicle to make up for it.
- Market Adjustments: While these were always common on limited edition and extremely rare vehicles, they became much more prevalent on normal vehicles during the pandemic when supply issues caused inventory shortages. Again, this is pure profit for the dealer and can often be from $1,000 to $50,000 on some rarer cars. Remember that the factory has a “Suggested Retail Price” for a reason, and banks / insurers will base the value of your vehicle on that number, not a marked-up price based on a ‘market adjustment’ the dealer charges you. You should always negotiate this away, or seek out a different dealer who isn’t as greedy.
- Dealer Options: These are aftermarket extras put onto a vehicle by the dealer, such as rubber floor mats, window tint, paint protection, nitrogen in your tires, etc. The dealer decides the price for these and they can often add up to well over $2,000, and in many cases they don’t actually install them until after you purchase the vehicle. If you don’t want them, negotiate them out of the deal. If they’re already installed and you really don’t want them, ask them to get you a call from a different dealer that doesn’t have them (don’t agree to pay a transportation fee) or simply go to a different dealer yourself.
- Service Contracts: These are simply pre-paying (or including them in your financed amount) normal auto service like oil changes and tire rotations. In some states, dealers are not allowed to mark these up and they can be a great value, but states they can, and they can easily be a bad deal. Ask for the actual price of the contract (not how much it adds to your monthly payment) and what all it includes, and do the math to see if its worth it.
- Extended Auto Warranties: Again, some states don’t allow the dealer to mark these up on price but some do. Even in states where they can’t be marked up, the dealer usually makes a 100% markup on warranties. If you’re not in a financial position where you can afford a potential $2,000 repair if your transmission goes out, then they can help protect you from these unexpected costs, however consider that the company who furnishes the warranty has decided that mathematically they’re likely to be profitable selling the warranty at half what you will pay for it.
- GAP Coverage – If you’re financing your vehicle, and you happen to total your vehicle, GAP coverage will pay off the remainder of your loan above and beyond what your auto insurance doesn’t pay (your auto insurance will only pay the current market value). So if you buy a new vehicle with no down payment, and no trade in, this can be a good protection, but many dealers tend to mark it up drastically. Best practice is to add it to your personal auto insurance, and not buy it from the dealer.
When in doubt, ask the person doing your paperwork to explain any fees that you don’t understand, and always ask if they’re required to complete your purchase. If they are evasive, be sure to look it up yourself and don’t be afraid to walk away if you’re uncomfortable! Theres plenty of dealers and plenty of vehicles out there, and you should feel good about your purchase!