Last Updated on January 1, 2023 by Bernard Juchli
Howdy, Driver? A dealer prep fee goes by many names including preparation charges, make-ready charges, and prep fraud. It becomes fraudulent when the dealer inflates service fees or includes unnecessary service charges similar to the payment packing scam.
What is Dealer Prep Fee?
A dealer prep fee is a fee a dealer charges for preparing a vehicle for sale. The fee ranges between $500 and $1,000 depending on the dealership and the prep service claims made by the dealer.
Typically, a dealer preps or make-ready new vehicles that arrive for sale from the manufacturer. Even used car dealers that purchase from wholesale lots introduce prep or make-ready fees to specific used cars.
When a new vehicle arrives at a dealership from the manufacturer, the dealership does the following prepping:
- Install fuses
- Inspect the fluids thoroughly
- Wax the car
- Remove the plastic sheeting from the interior and exterior
- Install the antenna
- Place the license plate holder
- Wash the vehicle
- Road-test the vehicle functionality
- Vacuum the right areas
- Inspect the tires
The prepping works in the favor of a buyer because the dealer would be able to identify problems in the car and inform the manufacturer.
Some dealerships have a fixed prep fee for vehicles while some other dealerships use a percentage of the factory invoice price of the vehicle to determine its prep fee.
A dealer is allowed 2-3 hours by the factory to prep a car and could be compensated by the factory for the prepping work. Bigger dealerships with modern facilities and adequate workforce, however, can prep new cars within an hour.
Example of Dealer Prep Scam
The MSRP (Manufacturer Suggested Retail Price) of a car is $23,450, which includes the prep charges.
However, the salesman includes a sticker to the vehicle showing $500 for prepping (removing the plastic covering, road testing, vacuuming, washing, etc.), which increases the cost of the car. The additional amount for vehicle preparation is a prep fee and it is fraudulent when the dealer inflates the price or charges for services not provided on the vehicle.
When Prepping Fee on a Car Becomes Fraudulent
The prepping fee becomes a fraud when a dealer charges excessively for prep services they provide on a car. Most of the time, a dealer charges for pre-delivery illegitimately, but it becomes legitimate when they disclose it to the consumer in the purchase agreement. Pre-delivery applies to used cars particularly.
If a buyer questions the dealer about the additional prep fee, they will reply that the vehicle must be prepped after purchase to meet retail sales standards.
Typically, when a dealer buys a car from the factory, trade-in, or auction, the prep fee may be included in the final cost. But the dealer will re-include the prep charges to maximize profit.
In essence, a prep fee scam sets in when a dealer claims charges for services they may not have rendered on a car or adds already-paid services.
How Dealerships Prevent Consumers from Disputing Prep Fee
Prep fee is not illegal and a dealership can charge whatever amount they prefer. However, a prep fee is illegal if the dealer does not disclose it to the buyer on the purchase agreement. Since the dealer does not disclose the fee, it is considered packed payment and they deny the consumer’s right to negotiate.
Most dealerships attach prep charges to the purchase agreement. Thus, an uninformed buyer thinks that the prep fee is compulsory and non-negotiable.
The MSRP sticker typically states that license, gasoline, title fees, state and local taxes are not included in the total MSRP. Also, the dealer installed options or accessories are not part of the total MSRP.
However, the total MSRP covers the vehicle pre-delivery fee, which a buyer is not supposed to pay again. Instead, deceitful dealerships include the charges for prep fee plus pre-delivery charges, which becomes a scam.
What a Dealer Can Make from Prep Charge
Assuming a dealer charges a $500 prep fee per car and they sell about 100 cars for a month, the dealer makes $50,000 for that month from prep charges.
Note that some dealerships use a fixed percentage of the factory invoice price to determine the prep fee for a vehicle. So, they could charge a prep fee of over $500 for a particular vehicle.
Let’s have a brief illustration:
If the factory invoice price (price below MSRP) of a VW Passat is $31,846 and a dealer’s prep percentage is 2%, the prep fee is $636.92. So, the prep fee depends on the invoice price of a car and the dealer’s fixed percentage.
How to Avoid Dealer Prep Fee Fraud
Although the dealer prep fee is not fraudulent as such, you can avoid paying it. Below are the tips to avoid paying a prep fee on a car:
Visit the Dealership with an Expert
If you are buying a car for the first time, get an expert along. A salesman has a unique way of manipulating a buyer, except the salesman is inexperienced. They will try to manipulate you to agree with whatever quote they give.
Check the MSRP Sticker
After you outsmart the car dealer, check the MSRP for products and services covered in the total MSRP. Do not pay for services mentioned as part of the total MSRP.
Buy the Car Online
The competition is higher online. So, you can bypass the prep fee by bidding (if it applies) and buying a new car online. Meanwhile, you should know how to bid for a car online.
Dispute Pre-Attached Prep Fee
If the dealer includes the prep fee in the purchase agreement, request its removal and negotiate or refuse to pay the fee.
If the dealership refuses to withdraw the prep fee or discount the vehicle price, walk out of the deal. You may leave your phone number with the salesman if you admire the car indeed. When the salesman assesses the deal and considers their commission, they will remove the prep fee and the vehicle is yours.
Does Dealer Prep Fee Affect Your Monthly Payment?
Yes, if you finance a car, the dealer prep fee increases your monthly payment by the percentage the dealership uses to calculate the fee. For instance, if the dealer determines a prep fee by 2% of the factory invoice price of a vehicle that is $25,000, the prep fee is $500.
Vehicle Sales Price (plus prep fee) = $25,000
Prep Fee = $500
Interest rate = 7%
Below would be your monthly payments:
At 60 months, the payment is $495
At 48 months, the payment is $599
At 36 months, the payment is $772
If you substitute the prep fee ($500), the total amount becomes 24,500.
60 months payment = $485
48 months payment = $587
36 months payment = $756
Looking at the monthly payment differences, you can save more money if a dealership does not defraud you with prep charges.
Are Dealer Prep Fees Negotiable?
Yes, prep fees are negotiable. A dealer includes a prep fee in the purchase agreement to make an uninformed consumer think that it is mandatory and non-negotiable. You can dispute the dealer prep fee and ask the dealer or salesman to describe why you should pay such a huge amount for prepping.
The dealer has likely included the pre-delivery fee paid by the manufacturer already (check the MSRP sticker). If the salesman mentions “plus pre-delivery charges”, they intend to scam you. Pre-delivery charges apply to used cars mostly, though it would have been included in the deal before the vehicle was towed to the lot. So, you should not pay for pre-delivery again.
Can You Report the Dealership for Prep Fee?
Somehow, you cannot report the dealership for charging excessively for the prep fee to the law enforcement agency. It is not an openly illegal practice because dealerships are free to peg their fees at desirable rates. However, you can report an insincere dealership to the Better Business Bureau.
Note that it is a norm for the dealership to charge a prep fee when selling a car. If the dealer charges excessively or without disclosing it to you, it becomes a scam.
When you at the dealership, inspect the MSRP sticker thoroughly for backend products and services already covered in the total MSRP such as pre-delivery charge and prep fee.
Dealerships have attempted to have the product and services statement removed from the MSRP sticker. The reason is to list the statement on a separate sticker or the purchase agreement and inflate the vehicle sales price.
At the dealership, do not allow yourself to be manipulated by the salesman and do not dispute the additional fees with multiple salesmen. Of course, they will advise you to accept the charges.
Meanwhile, find out whether the doc fee is legal.