When you see the price tags adorning the windscreens of the brand new cars in a dealership, it’s easy to think that those big sounding numbers would mean big profits for the dealers.
But that’s not necessarily always the case.
That’s not such a problem for dealers though, because it’s not the sale of the car where they are making their real money
In fact, on most cheaper and mid-priced cars especially, the margin may be quite modest. That’s not such a problem for dealers though, because it’s not the sale of the car where they are making their real money. That comes from a wide variety of other sources, including the manufacturers of the cars they sell.
The assistance offered by manufacturers starts with what is known as a ‘holdback’ rebate. This rebate is designed to cover the dealer’s cost of buying a car (by way of finance) from the manufacturer. Dealers pay around 2 to 3 percent of the invoice price of the car up front, and this is then rebated quarterly after the car is sold. If they sell the car quickly, the rebate most likely will be larger than their finance costs, and they make a profit on the difference.
Manufacturers also offer dealers cash backs or incentives, to encourage them to keep the volumes up and to shift difficult stock fast.
The parts and service department is where the real gold is, however. Some estimate that up to 50% of dealer profits come from this source. Often the service advisor is working on commission, so he or she is motivated to extract as much profit from you as they can. Additionally, parts and labour are marked up considerably.
Dealers can stand to make thousands on the financing of your car, and interest rate markups are not uncommon. They also usually work very hard to make sure they extract a healthy profit from any trade ins. This is achieved by offering you a price for your trade that’s much lower than what they know they can sell it for.
And last but not least, there are all the extras and add ons. Extended warranties are good earners for dealers, as is insurance and options such as metallic paint or roof racks and the like.
All of this can seem like quite a minefield for the prospective car buyer. But it’s good to be informed, and of course, you’re not on your own.
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