Lowering The Value Of Your Car
Dealerships are in business and expect to make a profit from each sale. When you take your car for a trade-in, the dealerships appraiser will determine the value of your vehicle. You need to note that just because you have seen a car similar to yours selling at $5,600 in the market, that doesnt mean you will get the same value when you trade it in.
Dealers look at the condition of your car when coming up with the value. If your vehicle has high mileage, several dents and is not in excellent mechanical condition, its value will be negatively affected. The dealer will negotiate for a lower price, knowing that they will turn around and sell it at a profit. You will be in position to negotiate a better rate for your trade-in when you are prepared.
What Lowers Dealer Cost
On the other hand, the car dealer invoice is often not what they pay the factory for the vehicle. To lure buyers, carmakers offer incentives, like zero down payment, financing with low interest rates, and cash rebates. They do the same to dealers to entice them to buy more inventory and motivate them to sell more cars.
Carmakers employ several schemes to lower the dealer invoice cost after selling the car. Sometimes its a dealer holdback, which is a set kickback the factory pays the dealer once the vehicle gets sold.
Automakers also return money to dealers in the form of monthly sales-goal bonuses. You can often get a better deal on a new car at the end of the month. If a dealership is close to hitting its monthly goal, it may sell you a car for less because it may mean tens of thousands of dollars in bonus money.
Hidden Used Car Costs For The Dealer
Even if the dealer did pay $11,400 for the SUV, it could have cost almost any amount of money to bring it up to the standard you see now. When it came in it might have needed a service and an oil change, a couple of tires replaced, a bit of body repair, and good detailing. Those preparation costs could be no more than a few hundred dollars, but they could also be a couple of thousand dollars too.
Were not finished there either. If a car has less than a year of the manufacturer warranty left, the main dealer will probably include an extended warranty to top it up to a full 12 months, especially if its being sold under a manufacturer Certified Pre-Owned program. If the car is out of warranty, the dealer will probably put a full 12-month extended warranty on it. Those warranties are not free. The dealer has to pay for them out of the profit on the vehicle theyre selling.
All of a sudden, that potential $3,600 profit could be down to less than half of that, and thats before you start negotiating a discount. Now Im not trying to sell you a sob story here and ask you to feel sorry for car dealers. What I do want you to understand is that margins are often going to be much, much smaller than most people think they are.
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Credit Checks For All
When a car buyer purchases a vehicle with all cash, theres no need for the dealer to run a credit check. However, a dishonest dealer may reference the Patriot Act as a justification to check your credit. That would be false.
Yet, it happens to car buyers all the time.
A dealership had the audacity to tell me that a credit check is required by the federal law, says Marilyn Gaskell, Founder & Hiring Manager of TruePeopleSearch.
A credit check may not seem like a huge deal, but the hard inquiry can knock a few points off your credit score. On top of that, the salesperson may use the information to get a leg up on negotiating.
How Dealers Set The Price For Used Cars
Setting the price for used cars has become a whole different game today than in the days before tech and the internet.
Back in the days, dealers would get a used car, do all the repairs and the refurbishments, and set its price. To set the price, they would simply add up what they paid for the car, all the repair and refurbishment costs, and the profit they would want to make off of it. This last part could be anything from $500 to $2,500 . When all these prices were added up, they came up with the selling price.
After this, they would simply put an ad on the local newspaper, and when someone called inquiring about it, they would usually negotiate the price and settle for a bit less than the selling price.
Things are a bit different these days as most customers have access to all the information they need about the car being sold online. So the old way of selling is done.
Most used car dealers use complicated software such as vAuto to determine the appropriate selling price for any used car. The software compares the price of all the similar vehicles in the market and factors in things like the season and the location to determine the best value for the used car.
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What Is Dealer Markup
Car dealer markup is what dealerships add to jack up the price of a car. Its above and beyond the factory MSRP.
A dealership makes its gross profit on a vehicle from the spread between what it must pay the factory for a car and the amount it collects from a customer at the point of sale. Once a dealership subtracts expenses, such as the salespersons commission and so forth, thats their net profit on the vehicle.
Theres your wiggle room for negotiations on that new car.
When a hot car, such as the Chevy Corvette or Audi R8 goes on sale, thats where dealers will sometimes mark up a price over and beyond the MSRP.
Car dealer markup gets clearly stated on the window sticker or Monroney label, and its all gravy. While a car dealership may only be making a slim profit on each car it sells, its probably doing just fine. Most dealership profit is generated behind the showroom and on the used car lot.
Besides having you sign all the paperwork to close your deal, the finance manager will offer to sell you extras like extended warranties, gap insurance, and upholstery protection. Be wary of such additions. Most people do not need these items anyway, including the upholstery protection.
Bottom line: It doesnt hurt to ask questions and negotiate on any unreasonable fee.
Clean The Car & Make It Look Nice
This is a no-brainer, but it is amazing how many used car dealers actually overlook the importance of this point. Most of the people you will be selling your car to arent going to be car enthusiasts. They will be regular people looking for a nice car that they can use to commute to and from work or school. So just so long as the car works, the only other factor they will use to determine the cars value is its looks.
Make sure youve done everything you can to make the car look nice and clean before you put it on display.
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Pushy Encouragements To Finance Through The Dealership
Although youd think a car dealer would prefer the certainty of an all-cash purchase, thats not the most profitable option. Dealership financing programs can generate healthy gross profits, so they can make more money in the long run from issuing loans.
In fact, a shady dealer may even raise the sticker price if you offer to pay with all cash.
This is an important factor to keep in mind as youre going through the car buying process. Any dealer that claims financing is the best option may be trying to pad their bottom lines.
Car Servicing And Parts
Finally, we get to parts and servicing, which is the mysterious other half of a car dealers profits. It accounts for the missing 49 percent of income and includes:
- Annual car servicing
- Car repairs and other maintenance
- ADAS realignment
- Car accessories
- Branded car parts
It is for the sheer profitability of the service and parts sector that many blue-chip car brands like BMW have pivoted toward a stronger customer service philosophy. This is especially the case when it comes to aftersales service. If youve ever encountered one of the Product Geniuses of BMW, youll know that theyre more than just salespeople. They become your point of contact at the dealership for all things you need.
Any time you have a problem with your BMW, you phone your genius not sure how to find something in the infotainment system, phone your genius you want to know about accessories that will help personalize your BMW more, phone your genius. The list goes on. Tesla has a similar model with their Sales Advisor positions. They boost sales by offering unparalleled continuous service.
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Car Dealerships Markup Loans
First, its important to understand that if you finance your purchase through a dealership they will make money on the loan. Dont get too upset about this.
Car dealerships offer something to lending institutions that you and I cant volume. Generally speaking, car dealerships get access to loans at rates that individual consumers cant. Dealers then mark up these loans and resell them to customers.
Keep in mind that you dont have to get your car financed through a dealership. The next time you buy a car, you should consider getting a pre-approval on a loan from another lender, in addition to seeing what the dealer is able to quote you.
How Car Dealers Make Money When You Trade
How do dealers make money when they trade-in your car? How can they make profits from this transaction? We explore how they do this.
What do you do with your current car when you want to replace it with another one? Do you sell it or trade it in at the dealership? Today, drivers in the US keep their cars longer than they did in the 90s. People who buy their vehicles new keep them for an average of six years. More than half of used car buyers prefer to trade in their cars over finding a buyer themselves.
Many dealerships encourage trade-ins, but how do they make money from this type of sale?
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Dont Sign Any Papers Until You Are Convinced About The Purchase
A car salesperson will try to get you to commit to the purchase even when you are not sure about the figures. Unfortunately, buying a car can be an exhausting process. Sometimes buyers want to get it over and done with so they quickly close a deal without fully understanding the financial implications of the purchase. Dont fall into that trap. If youre not sure about the car, it is better to just walk away than buying it.
Further Reading
Understanding The Dealer Margin
Invoice price reports can show you exactly how much the dealership paid to acquire the car from the manufacturer and put it on their lot for you to buy. In some cases, the difference between the invoice price and sale price is only a couple of dollars. That said, dont expect to knock several thousands of dollars off the vehicle asking price as odds are that would translate into a considerable loss for the dealership. Instead, calculate exactly how much wiggle room the dealership has and propose a price that you think will be fair for both yourself and the dealer.
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The Surprising Ways Car Dealers Make The Most Money Off You
As much as people obsess about negotiating the lowest possible price for a new car, thats not where car dealerships make the most money.
That would be the Service and Parts Department, where youre probably not going to be able to negotiate a cheaper hourly labor rate for work thats not covered by your warranty. Youre not likely to get very far with your best offer for a replacement transmission or a set of tires, either.
The Finance & Insurance Department, where dealerships are open to negotiation, is also highly profitable.
Financial results for the six publicly traded, new-car dealer groups in the United States show that to a great extent, dealerships are in the business of selling new and used cars so they can service them and finance them.
Compared to the new-car department, gross profit margins for dealerships are much higher for service and parts also for arranging financing and for selling extras like extended-service contracts, often called extended warranties.
For extended-service contracts, the markup can be as high as 100 percent. Dealerships also make a profit on loans and leases negotiated at the dealership. In effect, the dealer gets a cut of the interest rate profit made by the lender.
In the fourth quarter, between the dealer markup on loans and leases, plus the sale of F& I products, the six publicly traded dealer groups averaged about $1,100 per vehicle in F& I revenue. That average includes new and used cars and trucks.
What To Pay: How To Determine The Right Price
Given the wild variations between invoice and retail pricing and now markups you might be wondering what a car is worth and what you should pay when buying a car. Its tricky enough, but Kelley Blue Book helps with suggested purchase price numbers.
The way it works is relatively simple. Enter the parameters of the vehicle youre considering model year, options, engine choice, transmission and Kelley Blue Book brings up a suggested purchase price based on several factors, including the cars popularity and the spread between base and invoice price.
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- Extended warranties: Many used cars from a dealership come with an extended warranty. Theyre also going to upsell you another extended warranty option. Check closely and read the fine print. If the vehicle is a year or two old, its probably unnecessary. For luxury vehicles, its often cheaper to buy an extended warranty because of the cost of parts and labor.
- Certified pre-owned: When you buy a certified pre-owned car, the vehicle has passed rigorous inspections and is in excellent condition. Read more about CPO cars.
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Yes Dealers Make Money On Financing
Financing makes the dealership money, Hamilton explains. It is here we can increase our revenue through extended service plans and marked-up finance rates, which is a big area of profit for dealers. Dealerships buy financing at one rate and sell it to customers at another and keep the difference. This can add up to thousands of dollars over the life of a loan. However, this means that loan rates are a negotiable item for dealerships, too: if they are feeling pressured to hit a sales goal, they may be able to lower a customers loan rate to meet or beat that of a bank.
Dealers also can profit from what is called gap insurance, Hamilton told us. If a car gets totaled this insurance will pay off the the difference between what the insurance company pays for the car and the amount youve borrowed to buy the car. Gap insurance is usually only recommended to buyers who make a very small downpayment on a car and finance most of the purchase.
Knowing how car dealerships can make money can help you negotiate the best new car purchase price. Photo: Creative Commons
Should you sell your car independently or trade it in? Photo: Creative Commons
Car Dealerships Markup The Money Factor On Leases
If you dont buy a car, and instead you lease it, dealers have a way to make some profit there too. Dealers make money by marking up the money factor on a lease. The lender charges the dealer a money factor of say, .00125, and the dealer marks it up 50, 75 or even 100 basis points. The difference between the buy rate and the marked up rate is additional backend profit on the lease for the dealer.
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How To Refinance Your Auto Loan And Save Thousands Of Dollars
When we performed our study above, we felt frustrated for a lot of car owners. More than likely, a lot of hard-working Americans have purchased protection products, GAP insurance and extended warranties they aren’t using and have been overpaying on interest and monthly payments.
Thankfully, we can help you with two things here:
Understand and cancel protection products: Vehicle Service contract, Prepaid Maintenance contract, Ding & Dent protection, GAP waiver … lost track of what the dealer sold you? We’ll help you understand your protection products and cancel the ones you don’t need.
Lower your monthly payments: In our article ‘The best way to lower your rate? Make your payments!‘ we found that a lot of Americans can refinance their car loans and save thousands of dollars.
WithClutch.com is a fully digital platform that lets car owners like you do so from the comfort of their own home. No need to set a foot in a bank or credit union. You can lower your rate or get cash in as little as 20 seconds.
How Much Do Dealers Make On New Cars
Trust me, I know buying a car isnt easy. Believe it or not, neither is selling a car. After doing it for 43 years, I can assure you that being on either side of a car deal isnt the most pleasant experience either. This is in large part because of information asymmetry, meaning that the dealer has more information than the car buyer, and the car buyer has most likely been taken advantage of in the past by one dealer or another.
By now you know what our objective here at YAA is: we exist to support car buyers as they navigate the process. Today I wanted to share with you my best guess as to how much dealers make on new cars broken down by brand. These are estimates, and not facts. During my 43 year career I worked for a lot of OEMs , but not all of them. I dont know every brands profit margins, but I do have a good sense of what they are for most.
Want to make car buying easy? Let us do the hard stuff! Its like Honey, but for buying cars, trucks, and SUVs.
Keep in mind that profit margins are different by model and not just make. What do I mean? I mean that a Mercedes-Benz C300 is going to have less profit built into its MSRP than a G550. That being said, on average, my best guess is that Mercedes-Benz have eight percent profit built into the MSRP price. I hope that makes sense.
If you havent already, be sure to use our FREE Market Price Report which contains a suggested offer price to help you begin negotiations with any dealer on any car.
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