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Top 3 Ways on How a Car Dealer Earns Money

January 31, 2012

The life of a business will depend on how much profit is made. If a business is not earning profit, then there is no point in doing business at all.

Car dealers run a business. They are here to sell cars.

It is only natural for car dealers to earn money from every car sold. But did you know that your friendly neighborhood car dealer earns money on a lot of ways?

Here we will discuss the top 3 ways on how a car dealer earns money:

1. Car dealers earn money on the mark-up.

When the car dealer purchases the vehicle from the factory, they buy the cars at wholesale price. Of course, when the car is now displayed on the showroom, the car dealer will not indicate the wholesale price of the car: they will put the sticker price, or MSRP, in which the amount already includes the mark-up.

How much is the mark-up? The average is between 5% to 10%, but luxury automobiles will enable the dealer to charge more. Do you think that a 10% mark-up on a new car is not enough? If the car costs $25,000, then the markup will be $2,500. If the dealer sells 100 automobiles in a month, then they earn a profit of $250,000. However, the mark-up is not the only way that a car dealer earns money.

2. Car dealers earn money on interest.

If you choose to finance a new car, it will be helpful if you check the finance rate that is issued by the bank. This holds especially true if you finance a new car directly from the dealership.

It is a common fact that car dealers can 'push' the interest rate by as much as 2 points. In simple terms, if the bank issues an interest rate of 6.7%, the dealer can charge you a rate of as much as 8.7%. The interest rate is often called the 'buy rate' by your finance manager. Ask the dealer about the 'buy rate' so you'll know if you are getting a fair rate.

3. Car dealers earn money on the holdback.

Have you heard about the dealer holdback? This an amount that the manufacturer will 'pay back' to the car dealer after selling the car. The holdback is used by the dealer to pay for advertising and other incremental costs. It is also used to increase the car dealer's cash flow.

This is the reason why you will need to determine the true dealer cost of the car. By simply referring to the true dealer cost, you will prevent the car dealer from earning too much money on a new car.

This means that you will save money, while the dealer still earns a marginal profit.

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