Should You Ever Pay More Than MSRP for a New Car?
Several factors have come together over the last year or so that have severely disrupted the auto industry, and I wrote last year about why you should wait until 2022 to buy a new car. Unfortunately, things haven’t gotten any better and there are plenty of examples out there of car dealers offering their new vehicle inventory for sale at asking prices higher than the MSRP. A lot of people will therefore be asking the question should you ever pay more than MSRP for a new car?
You should never pay more than the MSRP for a new car unless you are absolutely desperate for that car for some reason, or you have more money than sense, and losing even more in depreciation than you would normally lose on a new car doesn’t bother you.
In this article, I’m going to explore why some dealers will sometimes ask for more than MSRP for their new cars, why it’s happening at the moment, why you shouldn’t pay above MSRP, and what you should do to avoid paying over the odds for a new car, truck, SUV or van in the current climate.
What should you do if a dealer wants more than MSRP for a new car?
If you’re in the market for a new car and dealerships are asking for more than MSRP for the vehicle you want, I think you should walk away. Unless you are absolutely desperate for that particular model or you can easily afford to pay whatever it takes to get it you have two options.
The first option is to leave it for the time being and wait until the supply crisis is over, and when plenty of dealers have stock of what you want, you can get back to the normal way of doing things. That normal way is to get the vehicle you want for a much BELOW MSRP as you can negotiate, which I cover in another article.
The second option, which is what I did a few months ago, is to look around for something else. I wanted a particular new car in August but there weren’t even any available at all. The best I could hope for was a six-month wait but I needed a car in the next few weeks.
Some leasing companies were claiming they had the car available but the prices they were asking were astronomical. Instead of accepting being ripped off, I started to search around for what other new vehicles were in stock and available at the time and leased something else.
Why is paying more than MSRP a bad idea?
Unless you are a big fan of depreciation and you simply can’t get enough of it, paying more than MSRP for a new car is a really, really bad idea. You already lose about 20% or more of the price you pay for a new vehicle as soon as you drive it away from the lot in normal times, and that’s when you’ve managed to negotiate money OFF the MSRP.
All you are doing if you pay more than the MSRP for a new car is throwing away even more in depreciation.
Don’t forget, it’s unlikely that we’ll be in this situation in three or four years when you might want to change your vehicle again. The normal order of the auto industry will have been restored by then, and do you know what the dealers will base your trade-in price on? It won’t be the 10% above the MSRP that you paid for your vehicle back in 2022; it will be based on the current market value and what the MSRP was in 2022.
Let’s say you want a brand-new 2022 Chevrolet Traverse RS AWD that has an MSRP of $47,395 right now. According to the caredge.com website, after three years and 36,000 miles that Chevy Traverse will be worth around $31,522 which is a loss of (depreciation) $15,873.
If you have to pay 10% above MSRP to get that Traverse at the moment, the amount of depreciation you’ll have to swallow in three years would then be more than $20,500. Does that sound like a good deal or a good idea to you?
Are car dealers allowed to charge more than MSRP for new vehicles?
Unfortunately, there’s nothing to prevent a car dealership from charging whatever price they want for their new car inventory. The clue is in the name; Manufacturer’s Suggested Retail Price. The S (Suggested) in MSRP is what does all the heavy lifting as the retail price is only a suggestion and not a hard and fast rule. After all, we live in a capitalist society where the price is driven by supply and demand, and that’s what we’re experiencing right now with the auto industry and other areas of the global economy.
In my experience, some manufacturers do frown on their dealerships charging above MSRP for the vehicles they supply them with, and in certain circumstances, they may even put pressure on their dealerships to refrain from the practice. I want to stress the “in certain circumstances” bit there though.
There are some occasions where the manufacturer would take a very dim view of their dealers trying to get more than MSRP for their new vehicles, but the current climate in 2022, and possibly even going into 2023, isn’t one of them for several reasons.
Why would a car dealer ask for more than MSRP?
The simple explanation for why a car dealer would ask more for a new vehicle than the MSRP is to make more money, and I’m going to say that some people won’t like that idea. After all, the company that builds the vehicle has decided what it thinks is a fair price for it, so why should a dealer know better?
Of course, it all comes down to the rule of supply and demand. If the demand for something outstrips the supply, the price will inevitably go up. The funny thing is though, we accept those rules in most areas of life, but a lot of consumers get really angry about it when it comes to the retail auto business.
Most people have no problem with a rare comic book going for many thousand times its original cover price when there may only be a few left around in decent condition. It’s the same with a painting by a long-dead artist that can fetch many millions of dollars because the artist is never going to be able to create another because they’re dead!
Personally, I can understand, accept, and even possibly condone the practice of asking for more than MSRP at the moment, but there are other circumstances where I certainly wouldn’t condone it. For me, it all comes down to why the demand is outstripping supply and it’s the difference between the dealer trying to make a living and blatant profiteering.
Why are dealers asking for more than MSRP right now?
Dealers are asking for more than MSRP for new cars at the moment because they don’t have enough new vehicle stock. I write website copy for some dealers in America and Canada who would normally have 500+ new vehicles in stock at any one time, but at the moment, some of them have times when there are fewer than 20 new vehicles in stock.
In these circumstances, I think it is perfectly understandable that they’d ask as much for the few new vehicles they have available to them as they can get. These businesses rely on a certain level of sales to pay the bills and then make a profit.
If they need to be selling 150 new vehicles per month to break even and they only have 50 vehicles to sell per month, they’re not going to be able to survive for long, are they? It stands to reason that they would try and squeeze as much profit from each sale as they can, and I can’t fault them for it.
And if you want to know exactly how much dealers in your area are asking for any new vehicle you’re interested in, check out the free, no-obligation quote tool below.
Why is there a shortage of new car inventory?
The main reason why there are so few new cars available at dealerships at the moment is a global shortage of computer chips that has caused automakers to slash production. This issue came on top of new vehicle production already being devastated by the pandemic.
When the pandemic first hit in 2020, most countries started locking down, people stayed at home, and new cars weren’t selling as dealerships were often closed. A lot of working from home started happening and there was a lot of uncertainty about when things would get back to normal, or if they ever would.
It would have been ludicrous for automakers to keep vehicle production at pre-pandemic levels when dealerships were closed and new cars weren’t selling, so production levels were slashed and some factories completely closed.
Even as things started to open up a little, car production couldn’t spring back into life as many workers were forced to self-isolate and there just wasn’t the manpower to ramp production back up.
And even if the automakers had been in a position to step production back up to pre-pandemic levels at the flick of a switch, the same issues they had faced were also being faced by those supplying them with raw materials and components in the supply chain.
Why is there a computer chip shortage?
When so many people around the world were forced to stay at home due to the pandemic they inevitably turned to electronic devices for working from home and for entertainment. This massively increased demand for consumer electronics that are controlled by semiconductors, or computer chips.
As the auto industry was almost mothballed at the time, it didn’t need the computer chips it normally bought in such vast quantities for vehicle production and the suppliers sold them to companies making TVs, computers, tablets, games consoles, etc.
When the auto industry started to come out of hibernation and found there was a pent-up demand for new vehicles all of a sudden, production couldn’t be increased to where it needed to be as there weren’t enough microchips available to make the vehicles.
The chip manufacturers were already working at maximum production to supply the booming consumer electronics industry, so the automakers couldn’t get the chips they needed to build their vehicles. There are other supply chain issues as well as the chip shortage, but a lack of available computer chips is the main reason why there are so few new vehicles available.
When is it not acceptable to charge more than MSRP?
Where I do not think it is fair for dealers to charge above MSRP is when a brand-new vehicle model is launched in normal times and more people want to buy them than they have available. You might think that’s exactly where we are now and I can see that point, but it isn’t the same.
There’s a big difference between a global supply crisis like we have now and the situation where something like a new Range Rover is launched and some buyers don’t want to wait. There’s still nothing to stop a dealership in those circumstances from selling what they have for thousands of dollars more than the MSRP, but as far as I’m concerned that’s encouraging queue-jumping.
How would you feel if you’d got in early and placed an order for a new vehicle and you were supposed to take delivery in the first week, but you then find you’re going to have to wait a couple of months? That would be annoying, but what if you then found out it was because the one you should have got has been sold to someone else because they were prepared to pay $10,000 more?
It’s easy to get swept away with things when you’re buying a new car as it can be an exciting event for many of us. But please stop and think about it very carefully if you are being asked to pay above MSRP. You might think it’s okay because that’s how it is right now, but consider whether you’ll still think it was such a good idea when you go to sell it in a few years and you realize how much money you’ve thrown away unnecessarily on extra depreciation.