How many times have you heard commercials on the radio where car dealers are offering big money over retail for your trade-ins or discounting cars to “their cost” for President’s Day?
What about friends who tell you they “pulled one over on the dealer” by buying the car for the dealer’s cost?
Chances are you’ve heard these stories before – but if dealers are giving away these crazy discounts and trade-in values, where are they making money?
ALL dealerships, not just high-end luxury and exotic dealerships, make money from three distinct divisions and 2-3 products.
The number one most profitable aspect of a dealership is NOT cars.
It’s their F&I (finance and insurance) office; that awesome office that gives you the financing approvals you’ve never realized were possibilities.
Their first order of business is to make finance deals with basis points, which means a dealer has a buy rate (assume 2%) and any percent over that is the percent of the loan amount paid to the dealer after 90 days.
If a dealer with a 2% buy rate sells you a loan for 4%, they made 2% of the loan amount.
On a $100K car that’s an extra $2,000.
This is one of the most consistently profitable venues for dealers.
Imagine how much they get when they sell 5-15% loans to people with bad credit and no credit.
The second most powerful sale in that very same office is the warranty sales, which are often purchased at core prices of 20% of the offered price to you.
That’s 20% OF the price, not 20% OFF the price.
If a dealer sells you a $2,000 warranty, they most likely pay $400 for this product.
The leverage on F&I products is significant, and dealers rarely carry products they can’t mark up 10X with the exception of manufacturer-based Certified-Pre-Owned Warranties, which are only marked up ~2X.
But they make the same dollar. Land Rover, for example, pays $2,400 to certify a car, but charges $5,000 for the warranty.
The third place most dealers make money is service.
The oil change you pay $499 for or the 12-month service you pay $1,299 for costs them less than $100 to fulfill between labor and parts.
This is where massive margins exist.
For example, parts are marked up 50%.
Labor is even more egregious. A dealer charging $120/hr for labor charges based on “book time” – meaning the amount of time the manufacturer’s handbook recommends a job to take.
They paid their technicians anywhere from $18-35/hr, but typically only on LABOR TIME. So if it takes a tech 3 hours to do a 5-hour job, the dealer makes $600 but only pays $100.
The final part is obviously on the car itself.
Dealers use tactics like telling you they are selling you a car at a loss or at their invoice, which is usually a lie.
Most dealers make up to 20% on a car sometimes less, but at least 10% margin is good assumption.
They also can make more if they are franchised dealers as moving new cars means more backend kickbacks from manufacturers AND from the regional corporate HQ to compliment them on moving so many units.
In short, car dealerships are like the mafia: they make money on everything and don’t give two fucks.
You have been warned. Know what you are buying, and know what it’s worth, or they will capitalize on your ignorance.