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Monday, October 23, 2023

Car Buyers Pay $9,600 More Because of Hidden Junk Fees

The average new car sold for $48,006 in March of 2023, according to Kelly Blue Book (KBB). However, car buyers "pay upwards of 20 percent more than they would have, had the actual price been disclosed upfront,” as stated by the Federal Trade Commission (FTC).


Car dealers are fiercely competitive. There are 18,257 new car dealers in the USA. Most metro areas boast large numbers of dealers where consumers can shop and compare prices. My Toyota dealership is in North Palm Beach, FL, and there are sixteen Toyota dealerships in my South Florida market. With the rise of online shopping, the number of dealerships available for price comparisons is nearly limitless. This should be a “consumer's dream market” because new car buyers can choose from a vast number of dealers who control the selling price for identical products.

All new car dealers selling a specific brand pay the manufacturer the same price. The manufacturer also permits their dealers to sell those cars at any price the dealer chooses. The manufacturer’s price sticker (Monroney label) is merely a “suggested” retail price. Naturally, the price dealers select is “AS MUCH AS THEY CAN GET.”

One might start to recognize a significant challenge for car dealers: how can they sell their new cars at a reasonable, or even fair, profit when numerous other dealers nearby sell the exact same car, possibly for less? Like all businesses, car dealers need to sell their products above what they pay the manufacturer, in addition to covering costs like sales commissions, building leases or rents, utilities, advertising, etc.

Since all Toyota dealers in a market sell the exact same car, the primary incentive they can offer a potential Toyota buyer is a reduced price. If a buyer decides she wants a new Toyota Camry, she'll buy it from the Toyota dealer she believes offers the lowest price. Therefore, the only way for a dealer to attract this potential Toyota buyer is to advertise or quote a price lower than competitors. This underscores the car dealers’ challenge: enticing a customer "in the door" (literally or figuratively) to at least attempt selling her a new Toyota.


The dealer's solution to this challenge? Deception. Misleading potential customers in advertisements and price quotations. They might feel compelled to advertise prices lower than all other Toyota dealers in their area. Advertising a higher price would risk not making the sale. If all dealers advertised identical prices, they'd risk accusations of “price fixing”, which can lead to substantial fines and incarceration.

Once a dealer convinces customers he offers a price lower than competitors, the next hurdle is increasing that price discreetly, leading to hidden junk fees.

The Federal Trade Commission notes, “Junk fees make it difficult for consumers to determine actual costs. Many shop based on an advertised price, like a car price in a TV commercial. When dealers add fees at the end of a transaction, or bury them in fine print, it complicates consumers' ability to ascertain the car's total price. Even when junk fees are individually listed, the sheer number of them can obscure the all-in cost of the car.”

Most car dealers recognize that adding junk fees can boost profits. In a market where these fees are common, dealers who strive for fair, transparent pricing appear more expensive than competitors, leading to lost market share. When junk fees are allowed, there's an incentive for dealers to concoct new ones instead of improving quality or reducing car prices.

Auto manufacturers aren't innocent in this junk fee scheme. They intentionally saturate the market with dealerships across the USA. More dealers mean more sales. Since manufacturers receive their asking price for every wholesale car, having more dealers increases sales and revenue. This places dealers in the tough position of meeting the manufacturers' sales quotas while still turning a profit. Both dealers and manufacturers thrive by deceiving the primary retail buyer.

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