Car Buying Advice Guide: Where a Dealer Makes Money

By

Automotive Editor

Armaan Almeida was an Automotive Editor who produced buying guides and sneak previews, in addition to publishing daily news stories and tracking monthly deals, incentives and pricing trends from Toyota, Nissan and Lexus.

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, Automotive Editor - July 18, 2013

Use this guide to get a lower price on your next new or used car.

In your efforts to get the best possible price on a brand-new car, information is your greatest ally. All the tricks, strategies and old wives tales you've heard about negotiating at the dealership do not come close to bringing the benefit of simply coming prepared. When working with a car dealer, that means having a basic understanding of their business so that you can agree upon the best possible price, and avoid getting taken advantage of.


Here's a rundown of all the stages in the car-buying process where the dealer stands to profit, plus a few helpful tips on how you can use this wealth of info to your advantage when seeking that rock-bottom price.

The New Car Transaction – Follow the Money

When you purchase a new car from the showroom floor, you'll see a window sticker 'invoice price' that often thought to be the amount the dealer paid for the car. But some dealers, on some cars, will sell you a car at, or just above, dealer invoice. The invoice price is generally a good target in negotiations. So how are they making any money on the transaction?

• Holdback – Typically 2 to 3% of Manufacturer's Suggested Retail Price (MSRP), the holdback is the primary source of 'hidden' profit for the dealer. While dealer invoice price can technically be considered what the dealer paid for the car, the holdback is not included into this number. That's because holdback is reimbursed to the dealer later in the form of quarterly payments. That's why a dealer can sell you a car at invoice, and still usually make a tidy profit. Mentioning the holdback, or trying to subtract it from your net cost, is a great way to sour the negotiation process.

• Dealer cash – When automakers want to move a lot of cars fast, they offer all manner of other behind-the-scenes payments to their dealer networks. While you won't find this info readily available for a given model, dealer cash can take the form of volume incentives, seasonal payments, advertising credits, wholesale reserve and credits, floor plan allowance, etc. Unless you are trying to buy a just-released or other hot commodity vehicle, just know that there's likely several hundred to a couple thousand dollars extra, on top of holdback, that's not reflected in the dealer invoice price.

• Showroom vs Internet Salesmen – Much of a car dealership's staff works on commission system, and understanding it will help you spot it if you're not dealing with a straight shooter. Car-lot salesmen make their commission as a percentage of gross dealer profit, which comes in tiers. This is when they'll often try to up-sell you on a higher trim level, or extra options, or even try to pull a fast one with hidden financing charges. Working with the dealership's internet sales department is always to your advantage. Since they make money on volume-based (rather than gross-profit-based) commission, their incentive is to sell lots of cars. You will receive a better price.

• Other Commissions-Based Staff – Salespeople are not the only dealership employees working on commission. Finance managers and service advisors also receive performance-based commission, and should not be considered to have your best interest in mind, despite all the friendly chatter. Finance managers increase dealer profits by hundreds or thousands of dollars by stealthily charging high interest rates, plus extended warranties that don't make financial sense, and useless add-ons like paint sealant and fabric protection. Service advisors also make commission off all parts and labor charges, so use diligence when agreeing to have any maintenance or extra services performed. They may tell you the job is essential to your safety when they're really only thinking about their next paycheck. Service departments are knowledgeable, and can be a great ally, but take anything they say with a grain of salt.

Used Cars and Trade-Ins – Huge Profit Margins

New cars may cost more in real dollars, but profit margins of less than $1,500 are typical. Used cars are where the real money is, with profit margins approaching $6,000 not at all uncommon. How does a dealer come out so far ahead on a car with a lower sticker price? Simple. They replenish their used car stocks by purchasing trade-ins, then selling them at big mark-ups.

• Knowing Real Trade-In Value – If there's one area of dealership business where consumers are often taken advantage of, it's on the trade-in. Salespeople and finance managers think of a customer as a single transaction, and if you have a valuable trade-in, they may even offer you an enticing price that's hundreds below dealer invoice. The problem is, the too-good-to-be-true deal is just that if they undervalue your trade-in by twice as much as you're saving on the new car. Don't fall victim to this scheme! Come armed with the Blue Book Value for your car, and see the two transactions as separate entities.

• Buying a Used Car – There is no published 'dealer invoice price' for used cars, because each transaction varies greatly. Thus, as the buyer, you'll need to do even more research to know what the vehicle is actually worth, taking into account trim level, options, mileage and condition. The best way to go about this is to search online for similar used models offered by other new car dealers in your area. Certified Pre-Owned used cars, while costing a bit more, are generally a good investment, as they represent the cream of the crop of trade-ins the dealer has purchased, and come with a factory-backed warranty that's almost as good as that of a brand-new vehicle.

Takeaways

  • Dealer invoice price is not the same figure as what the dealer actually paid for the car.
  • Holdback and other factory-to-dealer cash incentives boost profit margins.
  • Most dealership staff, including finance managers, work on commission. Be wary of up-selling, hidden charges and margin-boosting tactics.
  • Internet sales staff will generally offer a lower price than showroom salespeople.
  • Used cars are much more profitable per sale than new cars.
  • Be wary of a low purchase price, but offset by an undervalued trade-in offer.
  • Information is your greatest ally in any visit to the dealership.

, Automotive Editor

Armaan Almeida was an Automotive Editor who produced buying guides and sneak previews, in addition to publishing daily news stories and tracking monthly deals, incentives and pricing trends from Toyota, Nissan and Lexus.

Follow On: Google+ | Website

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