You know the car salesman stereotype. After doing your homework, you negotiate a great price for a car that’s just a hair away from the invoice price. Then the dealer starts complaining, trying to make you to think he’s losing money on the deal.
Don’t be fooled. Car dealers make money on almost all the cars they sell. Here’s how:
First, almost all auto manufacturers offer the dealer a “holdback” on cars. This is a small percentage of the price, usually amounting to a few hundred dollars, that the automaker gives back to the dealer for each car the dealer sells.
Second, if a buyer pays the invoice price car dealers can still make money from manufacturer cash incentives for cars that aren’t selling well. Incentives aren’t usually advertised, so it can be difficult for a buyer to determine which models carry this sort of incentive.
Next, dealers make money at the signing table, after you’ve negotiated the car price and are ready to finalize the paperwork.
It’s at this stage where you complete the details of your loan (if you’re financing through the dealer), including the fees associated with buying the car and any extras you agree to, such as a service plan, extended warranty or window tinting. With each of these items, the dealer increases his profits.
If you are trading in a car, a dealer makes money by offering you a price that is substantially lower than what the car would fetch at resale, or even at auction.
Finally, the service department at a dealership is a huge profit center. While many automakers offer free maintenance on cars that are still under the bumper-to-bumper warranty, dealers make money by selling you other services and products, such as tires or even windshield wipers. The aim is to get you into the habit of having your car serviced there after the warranty period.