Negotiating the price of a car can be nerve-wrecking – but only if you don’t know how to do it. According to J.D. Power and Associates, 36 per cent of car shoppers believe that dealers earn an average of $3,000 per new vehicle sold, while 26 per cent think that the margin is between $1,500 and $3,000. In reality, it’s just a little over $1,000. That’s why you have to be tactful when asking a dealer to lower the price.
The best way to succeed when negotiating with a dealer is to understand how car pricing works. Here is a step-by-step breakdown of how to obtain this information and use it to convince a dealer to lower the price.

Step #1: Choose Your Vehicle
In order to negotiate the price of any product, you need to know exactly what it is first. When buying a new car, you should know its year, make, model, trim level and options, if you want your negotiations to go smoothly. In the case of options you may need to be flexible since some of them could be unavailable, particularly if you are buying a car closer to the end of the year. It’s worth having more than one car in mind if you want to increase your chances of getting specific features for a good price.

Step #2: Find Out the Invoice Price and Dealer Profit
The next important thing you need to know before negotiating the price of a car is how much the dealer paid for it – or what is called the invoice price. Knowing this number will allow you to figure out the dealer profit amount, which we recommend to be three to seven per cent of the invoice price. To determine whether it should be three per cent or more, just look up the average price of your car and adjust the dealer’s profit accordingly. Usually, the more expensive vehicles are on the higher end of the percentage range, while the less costly ones are on the lower end. You can obtain the invoice and average prices by accessing a free price report at Unhaggle.com, if you live in Canada, or TrueCar.com, if you are in the U.S.

Step #3: Account for Dealer Fees
You should also be aware of all the mandatory dealer fees, including freight, PDI, air tax, tire stewardship and regulatory charges such as OMVIC or AMVIC. In addition to these, you may be required to pay the admin, nitrogen or block heater installation fee, though in most cases these fees are optional. The admin fee is typically required if you are buying a luxury car or shopping at a luxury dealership. The nitrogen fee is usually applicable to exotic or sports cars since they are the ones that need nitrogen tires. Finally, the block heater installation charge is mandatory in places where temperatures are continually below zero, so if you live in southern Canada, then don’t worry about it. Other fees may include the extended warranty, rust protection and VIN etching, but they are not mandatory.

Step #4: Calculate the Drive Away Price
The drive away price is the final price of the vehicle, meaning that it incorporates the dealer profit, additional fees, sales tax and incentives. Basically, it’s what you end up paying before you “drive away.” Start by learning the invoice price of the base model and all the options and then add or subtract the following (in the order listed):

1. Add the Dealer’s Profit: Usually three to seven per cent of the total invoice price
2. Add the Mandatory Fees: Freight, PDI, air tax, tire stewardship and regulatory fees like AMVIC or OMVIC
3. Subtract the Pre-Tax Incentives or Rebates: Manufacturer discounts that come into effect before the sales tax
4. Add the Sales Tax: Financial charge that will depend on your province or territory
5. Subtract the After-Tax Incentives or Rebates: Manufacturer discounts that come into effect after the sales tax

If you have followed these instructions correctly, then you should get your drive away price.

Step #5: Estimate Your Monthly Payments
Whether you are financing or leasing a car, you should know how much you will be paying for it on a monthly basis before walking into a dealership. First, determine the down payment, which should be 10 per cent of the drive away price or higher. Then estimate your interest rate – two to eight per cent is usually a good rule of thumb. Once done, insert the numbers into this calculator from Industry Canada and it should produce your monthly loan and lease payments for you. Don’t enter the sales tax though, because your drive away price should already account for that. If you want to make the calculations manually, you can learn how to do it in this article, but it’s not exactly easy.

Step #6: Start Negotiating
By this point you should have everything you need to make the negotiation process a success, so you better get to it. When negotiating with a dealer, make it clear to them that you know what you are talking about by showing them the drive away price and the steps you took to calculate it. You should also let them know that you have a pretty good idea of how much you will be paying per month. Keep in mind that many dealers often discuss the price in terms of monthly payments as a tactic to confuse the buyer and drive the price up. Always try to steer the conversation away from that and focus on the full amount. Try to be flexible, but don’t bend over either. The point of any negotiation is to find some sort of middle ground. And finally, don’t just talk to one dealer – explore every possibility before committing to a purchase.

Taras Trofimov is the Content Lead at Unhaggle.com. Unhaggle is a technology and data company that facilitates e-commerce for the automotive industry. Unhaggle provides Canadians with transparent access to information such as invoice prices, current incentives and more. Unhaggle also offers a wide array of pricing tools and buying guides that help consumers find great deals with little to no haggling involved.