cash back = sales tool

Article from October 2003 how things have changed.

Sales gimmick. The car is way overpriced to compensate, and you still
get to pay taxes, fees, and financing interest on the full "before" price.

"Cash back," or a manufactures rebate, is a result of a mistake Chrysler
made back in the late seventies.   Chrysler in a effort to more inventory
near the end of the model year, advertise that it was reducing the MSRP of
some of their best selling lines by $1,000 on vehicle which at the time were
selling under $10,000.   It turned out to be a terrible move.  I devalued
every car they had sold prier to that time and lowered the value of late
model used cars back as far as five years or more.

The are three prices when it comes to new vehicle, MSRP, Invoice and Net
invoice.  "Net Invoice" is the Invoice price after the holdback is taken
back.   Hold back is paid quarterly to dealerships.

Generally the hold back is 3% of the invoice.   Lets say a decent dealership
sell 500 vehicles a month.  In three months he will have a credit on 1,500
vehicles of $X in hold back, $X in warranty reimbursement and OWE the
manufacturer, and their credit arm, $X in dis-allowed warranty claims,
special tolls and floor plan interest.   The manufactures will send the
dealership a check for the difference or a bill as the case may be.

The "Invoice" is the amount the dealership actually pays the manufacturer,
when they sell the car.   MSRP is self-explanatory and is generally 12% to
16% above the Invoice price   Generally many dealerships, particularly
import brands, offer their vehicles they sell for MORE than MSRP by adding
dealer installed high profit options.

When dealer "negotiates" a selling price they "give away" the profit on the
add-ons first and try to get MSRP.  If a deal gets too tight they will give
away some of the difference between the MSRP and the Invoice price or in
extreme cases will give up down to the Invoice price IF one has a trade off
from which they can get some of the giveaway back.

When the manufacturers offers a rebate they can more easily do so because
the manufactures rebate given to the dealership by the customers can then be
used to pay the Invoice, thus reducing his actual cost by the amount of the
rebate.   A buyer can choose to receive the rebate from the manufacturer but
he will pay that much more to drive home the car and will be taxed on that
higher amount. If they do they will pay higher interest on the greater
amount of their load and depending on where one lives, and their situation
with the AMT, they will end up paying income taxes on that amount as well

Let's say a vehicle has an MSRP of $25,000 and an Invoice price of say
$21,000.  The dealer makes a profit of any amount that is over 21K.   The
car you want has an Add-0n package of $2,500 a typical amount or a selling
price of $27,500.

Let say they offer to sell you the car at $23,000 and you agree to apply
$4,000 rebate to the sale.   Your trade has an NADA wholesale value of
$10,000.  He says I will give you $7,000 which is $3,000 under wholesale.
He shows you the invoice and says I must have $21,000 to pay for the new car
and you are only giving me $19,000 in cash and trade.  I think you will
agree it if fair to make a $1,000 profit on a $27,500 car.   You go home
happy because you saved $10,000.   The dealership makes a gross profit of
$9,000.   He then makes another $3,000, when he sell you car for $13,000.
Unless he takes another trade on your car for less than wholesale, as well.
Too cap it off, he will make another 1% to 2% off the finance charges you
will pay over four years    ;)