How Car Dealers Make Money
Steve Hague, author, speaker, and Certified Purchasing Manager
Editor’s note: Steve Hague is a frequent contributor to this blog.
Most auto dealerships, like the cars and trucks they sell are finely tuned machines of commerce. Their goal is to earn a profit by meeting a need of selling automobiles to the public.
Besides the actual sale to the consumer, the other five ways that car dealers make money are:
- service or repair
- extras and fees
- extended warranties
- financing
- trade-in’s.
Let’s examine each individually so we know how to do mutually beneficial business in the most beneficial fashion.
1—–Service or Repair This is the most profitable department of most auto dealers. If you’ve had your car repaired lately it should be no surprise! With labor rates in the range of $79 to $89 per hour in some places, it’s easy to see how a simple repair can cost $300 to $400. On top of the actual labor costs, all of the materials that the service center uses are sold to you at a profit also.
2—–Extras and Fees When you finish negotiating to buy that new car and are satisfied that you’ve gotten a great deal, your feeling of satisfaction and relief is rewarded with an invitation to met the Finance Manager. Great, but don’t let your guard down yet!
The Finance Manager is also a salesperson and in many cases is trying his or her best to talk you into paint or fabric protection, an alarm or stereo, detailing and more. Resist the urge to buy these extras at this point. If you decide that you want any of these at a later date, shop around after you’ve driven out of the dealers’ lot so that you don’t feel pressured.
3—–Extended Warranties Extended warranties are another source of profit for the dealership. Most cars today are built so well especially under the hood that extended warranties should only be purchased if you drive well above 15,000 miles per year. Even then one should think twice weighing the potential for problems versus the costs involved. Also, make sure that the policy mirrors the one that the manufacturers’ policy would cover.
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4—–Financing If you are among the few not paying in full and you’re not financing through your own bank, credit union or other financial institution, that means that you’ve decided to finance through the dealer. That also means that the dealer thanks you very much for adding more profit to his bottom line. Yes, they have arrangements with the same financial institutions and when they pass their best rate along to you, they’ve most likely added 1/4 percentage point to the rate for themselves. Do the work yourself by finding the best rate you can and then asking the dealer if they can beat that rate.
5—–Trade-In Did you beat the car salesperson senseless (figuratively speaking of course) in negotiating the price of the new car? Take a bow! Just know that if you’re trading a car in, he most likely didn’t give you fair value for it. In fact, the better you did negotiating the price of the new car, the worse you’ll do on the price of the trade-in.
So now you know that a car dealership is a multi-profit center business. Use this knowledge the next time you’re in the market for a car and you’ll keep more money in your own pocket!