How Do Car Dealerships Make Money?
Many car shoppers falsely assume that selling cars is the primary way dealerships make money.
While new vehicle car sales account for 58% of the dealership’s total sales, they make up less than 26% of the dealership’s gross profits.
If dealerships aren’t just making money from selling new cars, how are they doing it?
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Do Car Dealerships Make Money From Selling Cars?
Dealerships make money from new cars, used cars, and trade-ins. According to the National Automobile Dealers Association, dealerships make about 30% of their revenue from car sales.
New Car Sales
Dealerships must carefully price new cars to generate a profit. Never assume that the invoice price on the car is what the dealer paid for it. Here’s how dealers make money on new cars.
- Dealer Holdback. The manufacturer will pay the dealer once the car is sold. The dealer holdback is typically 1% or 2% of the invoice or sticker price of the car. For example, the dealer holdback on a $30,000 car is $300 to $600.
- Dealer cash. Manufacturers may also offer bonus incentives for dealers to sell the vehicles. The incentive to move the vehicle off the lot is dealer cash.
Used Car Sales
People may assume dealerships make more money from new cars than used cars because of the higher price ticket for new cars. Interestingly, dealerships can make a lot of money from selling used cars. Because of the variation and subtle differences in used cars, it’s often harder for buyers to compare directly.
Additionally, dealerships can acquire used vehicles from a variety of sources for far below market price. This way, when they sell the used cars they can ensure a high-profit margin.
Dealers can make significant money from trade-ins. When you trade in your vehicle at the dealership, you will not receive as much for it as when you sell it privately. The dealership will buy your trade-in for lower than retail value so that they make money on the car once they sell it.
Because of this, you should always make the trade-in a separate deal from your car purchase to ensure you get the best deal on each.
How Do Car Dealerships Make Money?
Car dealerships make money from selling cars, but they make the majority of their money from other services. Here are other ways dealerships make money aside from selling cars.
Finance & Insurance
Financing and insurance is a huge source of income for dealerships. The NADA estimates that 73% of used-car purchasers and 90% of new car buyers implemented financing. Financing is an increasingly important part of dealership profits.
Dealerships do the work to negotiate financing from their lenders. The way they make money is with a higher interest rate. The dealer may negotiate a higher interest rate with the buyer than they get from the lender. The dealer then takes the difference as compensation.
Maintenance & Repairs
Many dealerships also offer maintenance and repair services. The dealership service department is a way for dealerships to make money from customers over time. Some even offer free oil changes or deals for small repairs to entice customers to return for more extensive maintenance and repairs. Some extended warranties even require customers to use dealership-authorized services for any repairs. If you're using nitrogen-filled tires, frequent trips to the dealership may be required.
Dealerships also make money through protection packages. Protection packages include an exterior protective coating and an interior protective coating. The exterior coating protects the paint from the elements, and the interior coating protects the fabric. Most packages also include rustproofing for the car’s undercarriage.
Many dealers sell protection packages for around $1,000 and make a few hundred dollars of profit. Before buying protection packages, carefully examine your standard warranty. Most warranties include guarantees for rust or paint problems.
Many dealerships offer extended warranties for used cars since they are often past the manufacturer’s warranty. Dealerships advertise extended warranties as a form of coverage to handle many of the same requirements as a traditional warranty. These extended warranties make the dealership money.
There is debate over whether or not to get an extended warranty because many include so many loopholes that they rarely cover repairs. Always carefully examine extended warranties for conditions before deciding if one makes sense.
Frequently Asked Questions
How car dealerships make money?
Car dealerships make money in a wide variety of ways. Of course, they make money from selling new cars, used cars, and trade-ins. However, dealerships make the bulk of their money from other services. For example, dealerships make money via finance and insurance, maintenance/repairs, protection packages, and extended warranties.
What should I avoid paying extra for at the car dealership?
There are some dealer fees you’ll need to pay when buying a vehicle, but there are also some you should avoid. The most common dealer fees to avoid are:
- Dealer preparation fees
- Dealer markup fees
- VIN etching fee
- Advertising fee
- Fees for unnecessary add ons
Are warranties from car dealerships worth it?
Many people purchasing used vehicles from a dealer consider an extended warranty. An extended warranty may also be enticing for new car buyers who plan to keep their vehicles for many years. Extended warranties from car dealerships can be worth it if you are very worried about potential expenses. However, make sure to read the fine print of the warranty before opting for it.
Are car protection packages worth it?
Car protection packages may be worth it, but many times they are not. Before getting a car protection package, look at your current warranty. Many warranties cover paint and rust issues. If your warranty does not cover paint and rust, consider if a protection package is worth the cost.
How much do car dealers make on a sale?
Dealers often make the most money selling used cars. The average gross profit for used cars is almost $2,000, but for new cars, it is $1,200. Manufacturers pay dealers between 1% and 3% of the invoice price for selling new vehicles. Ultimately, the dealership’s profit from a sale will depend on various factors and can vary greatly.
Should I finance through the dealership?
Always bring a loan preapproval to the dealership. This way, you can compare the quote from several lenders with the quote from the dealership. Dealerships may negotiate a higher interest rate than they receive from the lender and take the difference as profit. Simply having preapproval will help ensure the dealership does not try to hike up the interest rate.