How Much Do Car Dealers Make?

Car dealers don’t just make money selling cars. In fact, they make most of their money in other areas.

Before you begin to negotiate on the price of a car it’s important to understand how car dealerships make money. By understanding how car dealerships make their money (and how much money car dealers actually make) it will reveal the areas of the purchase process that are open for negotiation.

It’s equally important to understand how much they make in each area of the dealership because it will reveal how much flexibility the dealership has in its pricing. I will go through each of the ways car dealers make money and will include some key bullshit tactics almost every dealership deploys to get you to spend more than you should.

First, let me say that I don’t fully buy into this idea that car dealerships are full of sleazy-ass salesmen out to rob you. Those dealerships do exist, but I believe there are a lot of amazing dealerships out there that understand how important customer loyalty really is.

The important thing to remember is that car dealerships are a business and they actually do provide buyers with a host of services. They deserve to make a profit and as consumers, we are better off that there are competitive dealership networks. The process is only made difficult by the negotiation of a sale, which most people find to be a pain-in-the-ass.

I have purchased seven vehicles and intend to purchase another one soon, so it’s a good reminder for myself and it’s pertinent information to share with anyone who is currently looking to buy a car.

How Much Do Car Dealers Make?

• As much as $4,000 on trade-ins
• On average around $2,000 for new cars
• Around $750-$2,000 for dealership add-ons
• Financing, Warranties and Insurance products net $3,000+
• Service and Parts account for $3,000 on average over the life of the car

Dealerships can make anywhere between $10,000 and $15,000 on a consumer depending on how they structure a purchase.

As we look at each area of the car dealership and how they make their money, it will help you identify the ways in which you can negotiate to save yourself from paying too much.

How Much Do Car Dealers Make on Trade-Ins?

• Car dealers can make thousands of dollars in profit on trade-ins
• They keep you focused on the purchase, not the trade
• They give you a wholesale value, expecting you not to negotiate
• They include the trade-in with the purchase so it feels like a moot point

Most people go to a car dealership with a trade-in so it makes sense this is the first of the bullshit tactics that a dealership deploys. Here they deploy a tactic I call “The Vanishing Act”.

Essentially, the first thing a dealership will do is it take your keys and move your car to “value your trade”. At the negotiating table, you suddenly feel like you don’t actually have a car anymore because all signs of it have “vanished”.

This shit makes me so angry and I can’t stand it. The best thing to do in this scenario is to constantly remind the salesman (and yourself) that you have a car that you drove in and that same car can drive your ass home too.

The reason dealerships do this is because most people are so caught up in negotiating the purchase that they forget to negotiate the trade and this gives the dealership a huge advantage.

It allows the dealership to secure a trade-in at a wholesale price. They do this by keeping you focused on the purchase, making it seem like the trade-in value is a firm number, but more importantly downplaying it.

Often times the trade-in is discussed at the end of negotiating the purchase price or the value of the trade is simply included in the final bill of sale. This makes it feel almost unimportant and like the dealership is doing you a favor.

The reality is, you have done the dealership a huge favor by handing them your keys for a huge discount.

The trade-in and the purchase price should be treated as two separate transactions, if both don’t make sense, then there is no point in continuing the negotiation.

To avoid this see our post: The Best Way To Buy A Car 

How Much Do Car Dealers Make on New Cars?

• On Average, car dealers make only a couple thousand dollars on new cars
• Holdbacks
• Dealership Incentives

The profit margins on new car sales are not nearly as big as some people think. For whatever reason people usually assume that dealerships are selling new cars at some crazy markup, but that’s really not the case.

There are only a handful of ways a dealership makes money on a new car sale and it can be variable depending on region and sales targets. Factory-to-dealer incentives, or “dealer incentives” and “holdbacks” are the only two options a dealership has to make money purely on the vehicle itself.

Each work differently, but both effectively reduce the dealers cost in a vehicle.

A common misconception is that dealerships have cash tied up on in inventory.  The reality is that car dealerships finance their vehicles from the manufacturer. This is why dealers want to move inventory quickly.

In doing this they might only have a cost basis of a few hundred dollars. After which that is covered by holdbacks on cash incentives and of course the profit on the car itself.

Dealership Holdbacks  vs Incentives

Holdbacks are 2-3% of a vehicles MSRP or Invoice price and are usually kicked back quarterly.

The way it works is a dealer pays for a car upfront and then 2-3% of the Invoice or MSRP is returned to the dealership after the vehicle is sold. It’s a way the manufacturer helps to boost a dealerships cash flow.

Dealer incentives are a little more convoluted and can be different depending on the dealership, but ultimately this is what drives competition amongst dealership networks.

Dealerships aren’t required to pass along incentives to you so be prepared to negotiate for them when you go to buy your new car.

At its core, dealership incentives do exactly what the name implies – they incentivize dealerships to sale. A typical incentive provides a rebate from the manufacturer to the dealership when certain sales targets are met.

If you play your cards right a dealership will offer you a portion of their incentive to get you into a car and it’s sort of a win-win. You get a discount and the dealership gets to hit a sales target.

How Much Do Car Dealers Make on Used Cars?

• Depending on how the car is acquired, it can range from hundreds to thousands of dollars
• Trade-Ins
• Auctions
• Create confusion about the true value of a car
• Use Carfax as a weapon

A used car will typically net the dealership several thousand in profit and are far more profitable than a new car sale, which on the average net a dealership around $1,000 in net profit.

We’ve covered how dealerships make money on trade-ins but don’t forget that dealerships also acquire inventory at auction as well. Unfortunately, if you don’t ask, they aren’t likely to let you know either.

Why is it a big deal? Well, despite what salesmen might tell you the truth is that cars go to auction when a dealership cannot sell them. Usually, they aren’t selling because of the vehicle history or some other questionable issues with the car.

And herein lies the biggest problem with buying a used car.

Most dealerships use a simple bullshit tactic of “creating confusion” to keep buyers from being able to pin down a fair price and used cars provide the perfect platform to execute this strategy.

As opposed to a new car with a sticker in the window where you can walk up and see exactly what you should be paying, used cars are much more difficult to get a handle on.

Avoid Confusion When Buying a Car

For starters, you’ve got to do some research and know what the demand for a particular car is and also what the supply is in your area. Then you have to factor in things like service history, maintenance cost, repairs, etc…

Pepper in any options and how the market values those options, mileage, and what I refer to as “previous owner hygiene” and it can be very difficult (and time-consuming) for the average consumer to know what they should be paying for a car.

Making it harder is the reliance upon vehicle history reports. Contrary to popular belief vehicle history reports like Carfax are not an open book of a vehicle’s history.

At its best it can just verify what a dealership is saying, but at it’s worst it will tell you exactly dick about a car. In fact, some dealerships will wave a clean Carfax in your face knowing damn well a car is a pile of shit waiting to break down.

It’s this confusion and uncertainty that gives the dealership an upper hand at the negotiating table, but it also gives you some leverage yourself.

One of the best things you can do before negotiating on a car is plenty of market research. Trust me, you are more likely to be disappointed you spent too much money than too much time.

How Much Do Car Dealers Make on Add-Ons?

• Anywhere from $750-$2,000
• Value Add-ons
• “Fake” Add-ons
• Exterior Cosmetic Add-ons
• Factory Add-ons

Add-ons can be found on the sticker usually above the MSRP. A dealership will disclose what it’s done to a car if it has done anything.

This brings us to the third bullshit tactic a dealership will deploy and that’s what I refer to as “being shady af”.

A dealership add-on isn’t always bad if it’s real. Things like protective paint films (PPFs) can be a very valuable dealer add-on. But things like “leather sealant” are total garbage.

It works like this: a dealership puts some cheap product on a car, like Rainex, which may cost, I don’t know, like four bucks. Then on the sticker they put “Clear Coat Water Protectant Layer” for like $1,000.

I’m not even joking this kind of bologna happens all the time.

Back in the day, the big one was pinstripes. Dealers would add an adhesive pinstripe onto a car and charge an arm and a leg for it. Then you got a sweet new ride with pinstripes and a peg-leg to go with it.

Some Add-Ons are packages from the factory and those should be very easy to identify and price independently if you ever feel the dealership is taking you through the wringer.

Just be on the lookout and be sure to ask exactly what each add-on is and if you don’t want them, work to get them negotiated out of the price or find a different car.

How Much Do Car Dealers Make on Financing?

• Dealers can easily make $3,000+ on financing
• Interest rate spreads
• Warranty products
• Insurance products

Once you hammer out the price of the car in the longest and most unnecessary negotiating process of your life you are then shuttled into a small office where a “finance guy” will meet with you.

Right out of the gate you need to know this dude is the realest of the realest.

Understanding what happens in the finance room and how to avoid the pitfalls is so crucial to not getting screwed. So, it’s very important you understand how dealerships make money on financing.

First up is a tactic that is such udder bullshit it should be illegal.

Finance guys will tell you only the highest rates available and then purchase a lower rate from a credit union or some other lender on your behalf and collect the difference on the spread between the two.

Yeah, you read that right. These assholes will actually sit in front of you and lie to your face and put you into a higher cost loan for five years, costing you thousands of dollars, just so they can get a couple hundred bucks.

I told you, the realest of the realest.

Avoiding Auto Finance Scams

Listen, the most important thing you can do is your financing research prior to showing up at the dealership.

Know the rates and terms you can be qualified for on the vehicle you are looking at and ask the dealership if they can meet or beat that.

In doing this, you force them to be honest, and if they can’t be honest then you know this is a shit dealership that you shouldn’t want to buy a car from.

Do not be afraid to get up and walk out right here.

Remember, these people will lock you into a loan for five years that cost more than other loans you qualified for and then look you in the eye and shake your hand. Do not be afraid to walk away. Next, the finance guys are notorious for selling crack-pot warranties and insurance products.

Tire protection, paint protection, gap protection, theft-recovery protection, window protection, glove box lining warranty, the list goes on and on. The reality is that they sell these products for one reason: because they make money on them!

These dudes aren’t charities, they are trying to get you to buy these products because they know they are profitable products. Don’t do it. Avoid that shit like the plague.

Remember, over 25% of the profit of each sale is secured in the finance office. Don’t play yourself.

How Much Do Car Dealers Make on Service?

• The average dealer will make close to $3,000 on service over the life of the car
• General service
• Scheduled maintenance
• Padding hours
• Branded merchandise

On average 55% of a dealer’s total profits come from parts and service. Here’s something to keep in mind: the friendly Service Advisor that you know and love actually works off commission.

That’s right, even these people are salespeople.

One bullshit tactic I call “padding the hours” is to tell you that service or repairs are needed earlier than necessary and then obviously beefing up on the hours it takes to complete.

We all know this scenario, you drop your car off for an oil change, but then get a call from the service advisor saying “a tech noticed your windshield wiper fluid was low and they just need to know if you want them to top it off for you” – boom extra half hour of labor.

It sounds petty, but it’ true. Dealerships use these service tactics all the time.

And while you wait, you will notice branded products everywhere, coffee in a little area loaded with new models, and sometimes friendly salespeople even come by and offer you to take a car out on a test drive.

Service is so profitable that sales managers will sometimes agree to sell a car at a loss in order to secure the customer returning for services and repairs. However, not all service departments are dishonest and the ones that aren’t are still able to get an incredible markup on the price of repairs and maintenance.

The reason for this is that cars have become so technologically advanced that it now takes a highly qualified individual just to diagnose a car’s problem, let alone repair it. Once a diagnosis is made the parts can be ordered wholesale at the dealership and repairs are billed hourly.

Consumer demand for more and more tech-dependent vehicles has created this problem. There’s always someone who has to ruin it for everyone. Thanks, Obama.

How Much Do Car Dealers Make?

• As much as $4,000 on trade-ins
• On average around $2,000 for new cars
• Around $750-$2,000 for dealership add-ons
• Financing, Warranties and Insurance products net $3,000+
• Service and Parts account for $3,000 on average over the life of the car

All dealerships make money in this way, but that’s not to say all dealerships are shady either. Some dealerships are amazing like Park Place and Sewell.

Dealerships that understand that a good and long-standing customer relationship is more profitable than screwing someone for as much as you can in one go do exist.

Although some aspects of a cars price cannot be negotiated it is important to have an understanding of how dealerships make money.

If nothing else it simply protects you from the bad dealerships and helps you recognize and reward the good ones and that only leads to a better experience for everyone.

Equally important is your understanding of how much dealers make in each its profit areas. Take note of this when you are negotiating so you can keep your counter offers within a reasonable and acceptable range.

Understanding how car dealerships operate is a good beginning, but it’s important to understand the best way to buy a car to avoid the hassle. Check out our article on The Best Way To Buy A Car and get the dealership doing the work for you!