How Dealers Make Money on a New Car

Individuals and businesses buy and lease cars all year round. The place to buy a car is usually at a dealership, although used cars can be bought in private transactions. A new car dealership sells models from one manufacturer; for example, a Ford dealership will not sell Toyota vehicles. Used car dealerships sell models from different manufacturers. New car dealers make money in several ways, starting with the markup.

Markup

The markup consists of several components. Dealers buy cars from manufacturers who specify the MSRP, or the manufacturer's suggested retail price. This is higher than the invoice price the dealer pays the manufacturer, which automatically builds in a certain profit margin. Manufacturers often pay incentives to dealers to move certain model cars from inventory. They also pay dealers a "hold-back" payment after they sell a new car for inventory and advertising costs.

Financing

Financing is another potential source of profits. Dealers usually add a couple of points for administrative costs to loans provided by financial institutions. Some dealers may try to encourage buyers to consider financing, even if they can make a cash payment. Leases can make money in two ways: First, consumers tend to buy more expensive car models because of the lower monthly lease payments; second, the dealer gets the cars back after two or three years and sells them in the used car market.

Fees and Options

The financing and insurance office of the dealership is another profit center. Dealers often charge service fees for handling the paperwork and preparing the cars, some of which goes to the bottom line. Extended warranties, especially for used vehicles, is another source of profit, as are optional items, such as fabric protection, tinted windshields and various electronic accessories. The National Automobile Dealers Association estimated that 28.5 percent of the profit from selling a new or used car comes from the financing and insurance office, according to a November 2009 article by Philip Reed of Edmunds.com.

Service

Dealerships often have attached service bays, which are an important source of profits. Labor charges for even the most basic jobs, such as oil changes and tire rotations, are fairly steep. Service managers are usually skilled at convincing car owners to sign on to repairs and tuneups they might not need. Repairing and repainting cars that have been in collisions or accidents is another source of income. However, body shops are usually not co-located with the new car showrooms; instead, one or more dealers might share a common body shop in the lower-rent industrial section of a city.

Other

Trade-ins and creative selling techniques are also moneymakers for new car dealers. The dealer often undervalues the trade-in allowance for older cars. After doing some basic maintenance, service and overhaul, the dealer can sell the car at a higher price in the used car market. Customers may walk into a dealership hoping to buy a small or mid-range car, but are convinced by creative sales staff to buy a bigger and more expensive model, thus higher profit margins for the dealer.

References

• Car Buying Edge: How Dealers Make Money on New Cars
• Listverse; 10 Ways Car Dealers Make Money Off You; Kay Jay; March 2009
• "Smart Money"; 10 Things Your Car Dealer Won't Tell You; Sarah Breckenridge, et al.; February 2010
• Edmunds.com; Where Does the Car Dealer Make Money?; Philip Reed; November 2009
• IntelliChoice; Behind the Scenes -- How does a dealership work?; Dan Carney