Invoice prices, factory rebates, F&I: what they mean and how to understand them

A 2014 survey by Edmunds.com found that people believe that buying a car is more stressful than planning a wedding. Recent research shows that consumers would rather be trapped in an elevator than spend an afternoon in a car dealership. The pressure consumers feel may be caused by different "unknowns" in the car purchase process. Typical automotive business terms only make things more confusing!

Disclosure: Automoblog and its partners may earn a commission when you visit the links below.

One of the most common, for example, is MSRP versus invoice pricing. In so many words, MSRP is for the consumer, whereas the invoice price is for the dealership. But does it do any good for you to know the invoice price? And what about factory rebates and extended warranties, both of which come up during the car buying process. How important are those topics when it comes to getting the best deal on a new vehicle?

Below we will cover some common terms and phrases you are likely to hear or see when shopping for a new vehicle. Understanding what they mean and how they are used will help as you search for a new car.

Manufacturer’s Suggested Retail Price

What Is The Invoice Price?

Why The Invoice Price Is Important

Factory Rebates

Can I Get a Better Rebate at Another Dealer?

What Does F&I Mean?

Going Through The F&I Process

Extended Warranties: Yes or No?

Additional Resources

Manufacturer’s Suggested Retail Price

Commonly shortened to just “MSRP,” this number is found near the bottom of the window sticker (it might appear in a bolded or highlighted box). The MSRP includes the standard vehicle price (i.e., without options), the pricing of optional features and packages, and the destination and handling fee. It does not include factory rebates or other incentives.

Dealers can actually sell vehicles at or above the MSRP, though it is rare (and some manufacturers will even warn dealers against doing so). Muscle cars, like the Shelby Mustang and specific versions of the Dodge Challenger, may fall into this category. This is not something you will need to worry about for the average sedan, SUV, or pickup.

MSRP is used interchangeably with phrases like “retail price” or “sticker price.” You can negotiate from the manufacturer’s suggested retail price, though it is not always the best course of action. Obtaining the invoice price is sometimes thought to be a better strategy.

What Is The Invoice Price?

Invoice prices are the amount the dealer pays for the vehicle. It’s sometimes referred to as “dealer cost” in the car business. When an automaker ships a new car from the factory to the lot, the dealer is given a bill (or an invoice). The invoice price generally represents the lowest possible number as a starting point for negotiations during the car buying process.

Below, we will briefly cover the difference between MSRP and invoice price, but will also suggest this more comprehensive guide on the topic. That guide speaks more specifically to why invoice price is important, how to find it, and how to use it to your advantage when you are negotiating the price of a new vehicle.

Our recommendation is to ask politely for the invoice price as part of the negotiation process.

Why The Invoice Price Is Important

If you can see what the dealer paid, this will allow you to “negotiate up” from the invoice price rather than “negotiate down” from the MSRP or sticker price. If you can obtain the invoice price or dealer cost as a starting point, you may find it helpful as you negotiate.

Generally speaking, if a sales consultant is paid on the gross amount of each individual vehicle they sell, there is more incentive for them to keep you near the MSRP for a more significant profit margin. By doing so, they will make a higher commission and the dealer more money. This is partly why car buying can feel like a battle as consumers and the dealership are immediately pitted against each other (which explains the results of the surveys we mentioned at the beginning).

If the dealer shows you the invoice price, you may feel like the ball is more in your court when you negotiate. However, since there is no guarantee a dealer will reveal what they paid for a vehicle, doing thorough research is still your best bet. Through Automoblog, we provide this free and easy search tool that will show you which dealers in your area are advertising the best price. Knowing what different dealers are offering in your area can play to your favor when negotiating.

Factory Rebates

Every customer is entitled to the current factory rebates, which the dealer subtracts from the MSRP. Rebates come in all shapes and sizes, so it’s best to check the manufacturer’s website to see the current incentives. You may also qualify for other rebates, like military service, college student/recent grad, or if you are a first responder. Conquest rebates are also popular and include extra money if you switch brands via trade-in (like trading in a Ford for a new Chevy, a Toyota for a Honda, a Mercedes-Benz for a BMW and so on).

A common misconception is that dealers somehow lose money by applying rebates, which isn’t true. The automaker guarantees rebates, so double-check to ensure you are getting the correct amount taken off the purchase price. Some dealerships will even have a giant marker board up on the showfloor that outlines the current rebates and incentives.

Can I Get a Better Rebate at Another Dealer?

Factory rebates can and do vary by region, so it might be tempting to search farther from your home. However, you usually have to take the rebates that apply to where the new car will be registered (i.e. where you live), not where it’s purchased. If you are going to search farther from home, it’s important to determine what a manufacturer considers as your region.

As a matter of personal experience, I purchased my 2015 Fusion from Sioux Falls Ford, my former place of employment in South Dakota. Sioux Falls is part of what Ford considers the Twin Cities region, so if you reside in that greater area, you are eligible for those rebates. However, since I now live in Michigan and registered my Fusion here, a different region entirely for Ford, I was subjected to this area’s rebates.

Even if the rebates had been better in South Dakota at that time, it would not have mattered since I live in Michigan. I also had to pay Michigan’s sales tax of six percent versus South Dakota’s vehicle excise tax at four percent. In the end, I probably didn’t save any substantial money by purchasing out of state (but was glad to help an old friend meet his monthly quota at the dealership and I needed a new car anyway).

The one exception to this is how a dealer from farther away might be keen to earn your business. I have worked with some dealerships during my time in the automotive industry that may (not always, so I emphasize the “may”) make an exception for a customer willing to travel. They might drop the vehicle’s price slightly or offer a little extra for the trade-in. This has less to do with the factory rebates (they will remain the same) and more to do with that dealerships are independent businesses, even though they sell a manufacturer’s vehicles. If they want to toss in an additional incentive for customers, they can.

The best thing is to make it part of the negotiation process. Ask the dealership if there are any extra perks since you are willing to travel farther than you usually would to buy. However, I would recommend shopping locally for a new vehicle if you can.

What Does F&I Mean?

This is an acronym for Finance and Insurance, but it’s less of a term and more of a separate process. Internally, this is sometimes known as the “hand-off” phase of the deal. It means the sales consultant has sold the car; now it’s time for another staff member to take over the process. Those staff members are F&I managers, and they are responsible for this part of the transaction. F&I managers handle the credit apps if you are financing and help you sign all of the paperwork at the end.

Going Through The F&I Process

F&I managers will likely present you with optional “add-ons.” This can include window tint, rear-seat entertainment systems, fabric protection, window etching, and various other accessories. Do your research first, as very few add-ons sold at the dealership are essential (you can avoid things like “rust proofing” the undercarriage, for example). I have done window tint and truck accessories like box rails and a soft tonneau cover in the past, but I pass on everything else.

If you opt for additional accessories or add-ons, consider paying for them in cash. During the F&I process, there is a natural assumption that everything will go into the loan unless you say otherwise. If you want a few extra accessories for your new vehicle, there is nothing wrong with that, just don’t pay on them for the next 60 months.

Extended Warranties: Yes or No?

The most common item you will see during the F&I process is an offer for an extended warranty, sometimes called an extended service contract. Schools of thought vary on extended warranties, so take everything with a grain of salt.

After my stint in sales at Sioux Falls Ford, I was a service advisor at our sister dealership, Luxury Auto Mall (Cadillac, Mercedes-Benz, BMW, and Sprinter). I had customers where an extended warranty benefited them greatly because expensive, unexpected repairs came up. However, I had customers who purchased an extended warranty, ended up driving maybe only 8,000 to 10,000 miles annually, and the extended warranty never benefited them. It was, in effect, a waste of money.

While not a hard a fast rule, if you drive a ton of miles each year, an extended warranty might benefit you. If not, you are probably okay with just the factory warranty.

Not every dealer or F&I manager does this but beware of subtle psychological tricks. I have seen some present warranties in terms of “protected” versus “unprotected.” The twist here is that it makes the customer feel uneasy in that the new vehicle they just purchased is somehow vulnerable (it’s not as there is a factory warranty). A good F&I manager will get a sense of how much you plan to drive the new vehicle and present options accordingly.

Even if you are interested in an extended warranty, you don’t have to purchase one through the dealership. There are third-party companies that offer extended warranties. Still, it’s important to research those companies ahead of time, looking up customer reviews and even consulting the Better Business Bureau. If you have questions about an extended warranty, here is a list of the top 10 extended car warranty companies for 2021.

Additional Resources

Here are a few “go-to” resources you can use when you are shopping for a new vehicle.

Not sure about a particular dealer? Cars.com offers this dealership and salespeople review tool.

The U.S. Department of Energy runs a website that shows EPA fuel economy ratings by manufacturer. The site has an option for side-by-side comparisons if you are considering a few different vehicles.

To help you find the best price on a new vehicle in your area, Rydeshopper is a neutral third-party vehicle search site we can vouch for. Like our search tool mentioned above, you can use Rydeshopper to see dealer inventory in your area, along with contact info and pricing.

If you have other questions about buying a car, please reach out to us directly. It would be our pleasure to assist you further.

Carl Anthony is the executive editor of Automoblog and a member of the Midwest Automotive Media Association and the Association of Automotive Historians. He is a board member of the Ally Jolie Baldwin Foundation, a former chairman of the Detroit Working Writers Association, and a big fan of the Detroit Lions.