The Truth About Car Dealerships
Car dealers may lead people to believe that they purchase their vehicles and that ties their money up in inventory. Not at all true. The auto dealers take out loans themselves to amass their inventory. The manufacturers provide the financing, the above-defined floorplan financing. You might think the dealer then loses money on interest, but that is not true either. The manufacturer reimburses dealers for their loan financing through a dealer holdback that typically equals one to three percent of the vehicle’s invoice price.
Here’s How it Works
It might cost the auto dealer $350 a month to finance each vehicle. Let’s say a car takes two months to sell. The interest costs them $700. The car costs $20,000 though with a dealer holdback of three percent. That equals $600. If the auto dealer sells the vehicle in one month or less, they make a $250 profit just off of the holdback. The holdback remains the same regardless of how long the car sits on the lot. The interest accrues though.
That is another reason that car dealerships want to move vehicles off of their lots quickly. They did not sink lots of their own money into the inventory. Sp they did the same thing you will do to buy a car or truck. They took out a loan. Their loan costs them interest, too.
What Automotive Dealers Make Most of They Money From
Automotive dealers make most of their money from the following:
- the extra money on your car loan interest,
- selling add-ons,
- trade-in vehicles
The interest that dealers charge you over and above the bank’s interest rate can net them as much as $3,000.
When it comes to trade-ins, they low-ball the price they give you, then they turn around and sell it for a profit after a little detailing and regular maintenance. The dealer makes about $2,000 on the trade-in once it sells. Then there are the add-ons. These include accessories to the car, maintenance packages, gap insurance, an extended warranty, and much more. Between parts and service plus on-site maintenance, the dealer can add about $3,000 to their profit.
All of that together means the dealership makes about $10,000 off of the sale of a single car. Now, you see why they so badly want to move vehicles off of the lot quickly. The interest rate from their own loans from the manufacturer quickly eats up the profit potential. If a car sits on the lot for six months, it quickly eats into their profit. Six months cost them $2,100 in interest alone.