Watch out for this hidden fee when buying a new car

If you've done your homework as a new-car shopper, you know charges like sales tax and registration fees will be added to the price you negotiated. But you may not be aware of the "documentation fee," which can run over $500 in some states.

This fee is a legitimate charge for preparing and filing the sales contract and other extensive paperwork. But it can vary widely from state to state, and in some states it's unlimited.

Find out about the "doc fee," as it's known at dealerships, before you begin serious price negotiations for your new car, advised Matt Jones, senior editor of consumer advice at Edmunds.com. Call or check the website for your state Department of Motor Vehicles to determine the state law.

Then as you ask individual dealerships in your area for price quotes, ask specifically about the doc fee. If you find a wide variation, you may be able to negotiate that fee downward.

Any amount you can shave from the documentation fee also produces additional savings. That fee goes into the total for calculation of sale tax and thus will be ultimately factored into your monthly payment if you're financing the car.

Rules for the doc fee are set by individual states. As you can see in the table below, the median fee ranges from $599 in Georgia to $80 in California. That figure in California equals the legal limit. But Georgia and many other states have no limit. In those states, some dealerships may advertise as a competitive strategy that they charge no documentation fee.

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Source: Edmunds.com

Important as this fee can be, don't get too focused on it. "Get your total out-the-door price. That's what counts," said Edmunds' Jones. A dealer with a relatively high documentation fee might be willing to cut the price of the car itself to offset the fee and keep your business, Jones noted.

He has a final tip as well for internet shoppers, many of whom now can do the entire negotiation online and with e-mail. "Be sure you test drive the car," said Jones. He cited cases he knows of in which a shopper decided a specific model was ideal without a test drive. Then after the purchase, the buyer found the car didn't have not enough acceleration, was too noisy or had other unforeseen problems.  

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    Jerry Edgerton, author of Car Shopping Made Easy, has been covering the car beat since Detroit companies dominated the U.S. market. The former car columnist for Money magazine and Washington correspondent for Business Week, Edgerton specializes in finding the best deals on wheels and offering advice on making your car last.