How Do Car Dealers Make Money?
Every time I drive pass my local car dealer, I think about the looming state of America’s auto industry. With car manufacturers struggling and shutting down factories, America’s car dealers are also feeling the pinch.
Compared to a few years ago, car dealers are making significantly less profit on new cars, in fact, according to Paul Taylor, the chief economist for the National Auto Dealers Association [NADA], the average car dealer lost about $30 for every new car sold through June 2008.
So how are car dealers making a profit and staying in business? Here are five ways car dealers are turning a profit in these difficult economic times.
1. Used Cars
In addition to buying cars directly from the public (also called street purchases); many dealers also obtain cars from used car auctions and trade-ins which account for more than 31 percent of used light vehicles on car lots.
2. Dealer Cash Incentives
Manufacturers often offer car dealers cash incentives such as a cash credit or cash bonus to stimulate sales. Because these cash bonuses are paid directly to the dealer, it is at the dealer’s discretion to pass it on to their customer.
3. Dealer Holdback
Dealer Holdback is a system of payments your dealer makes to the car manufacturer in order to stock their inventory full of new cars. Just like you may take out a loan when you purchase a new car, your dealer also finances their stock of new cars. Generally the manufacturer will pay the interest on these loans for the first 90 days. The dealer pays the invoice price for each car, so if a dealer sells a car before this period they will earn the holdback as profit (because the full interest charge is added automatically into the invoice).
4. Invoice Tricks
While you may be getting a great price if you’re offered a car either at or slightly above invoice price, your dealer may still be making a profit because of dealer holdback and dealer cash incentives.
5. Loans and Extras
Once the base price of the car has been established, upgrades, extended warranties and extras like fabric protection also add to the dealer’s profit. According to F&I Magazine, an extended warranty, on average, increases profits by $795 and dealer-arranged financing increases profits by an average of $947. In 2007, the NADA found that 28.5 percent of a dealer’s profit on new and used vehicles was generated by extras and the dealer’s finance and insurance office.