How Car Dealers Make Money?

Whenever I drive past my local car dealer, the looming state of America’s car industry scares me. The auto manufacturers are struggling and closing their factories which is pinching America’s car dealers.

Comparing the situation with the past few years, the car dealers are not making good profits on new cars. The chief economist for the National Auto Dealers Association [NADA], Paul Taylor says that the average car dealer lost nearly 30 dollars on every new car sold in June 2008.

The question arises how car dealers make profits and stay in business. Following are five ways how car dealers are making profit during these hard economic times.

1. Used Cars

The car dealers purchasing cars directly from the public casually called street purchases, most of of the car dealers also get cars from used car auctions and trade-ins which contribute to more than 31 % of second hand light vehicles on car lots.

2. Dealer Cash Incentives

Cash incentives are offered mostly by car manufacturers like cash bonus or cash credit for stimulating sales. Since these cash bonuses are directly paid to the dealer, the dealer has the choice to pass it on to their customers.

3. Dealer Holdback

It is a system of payments that are made by the dealer to the car manufacturer for stocking their inventory with new cars. Just like one takes out a loan when purchasing a new car, the car dealer also finances the stock of their new cars. The manufacturer will naturally pay the interest on these loans for the first three months. The invoice price is paid by the dealer for each car and if the dealer sells a car before this time then they will earn the holdback as profit. This is because the whole interest is automatically added to the invoice.

4. Invoice Tricks

While one gets a good price if offered a car either slightly above or at the invoice price, the car dealer may still be making profits because of cash incentives and dealer holdback.

5. Loans and Extras

When the base price of the car is established, the extended warranties, upgrades and extras such as fabric protection also make an addition to the profit of car dealer. The F&I Magazine says that an extended warranty averagely makes rise in profits by 795 dollars and the dealer arranged financing increase profits on average by a cost of 947 dollars. The NADA had found out in 2007 that 28.5 % of a dealer’s profit on new and second hand cars was generated by extras and the dealer’s finance and insurance office.