As a car buyer, you are typically at a significant disadvantage when it comes to understanding the process and how the car dealership earns money. When you purchase items at the grocery store or most other retailers, you understand at the buyer how the store earns a profit. They purchase items at wholesale and then resell those items at a higher price to the consumer taking into account their overhead and needed profit margin. But, do you know the car salesmen tricks they use to earn a profit?
But, things are a little different at the car dealership where there are many car salesmen tricks to squeeze you out of more money. There are so many other factors that go into their business model such as financing, your trade-in, holding inventory, loans from their bank, and a host of other things that are combined into how they price their cars and what price they ultimately sell them for.
My wife and I are considering buying a new car, and I dread it. I always feel like I’m getting taken advantage of by the car salesman and the dealership. Understanding more about the behind the scenes of a car lot arms you with more knowledge, better pricing power, and a chance of earning a fair deal. Here are some things behind the veil about car dealerships you may not know.
Car Salesmen Tricks They Don’t Want You To Know
Dealer Hold Backs
Car manufacturers typically hold pack a portion of the invoice from the dealerships and pay them that percentage at a later date. Many manufacturer hold backs are in the rage of 2% to 3% of the invoice price which is pure profit.
For example, if a car has an invoice price from the manufacturer of $20,000, the manufacturer will keep 3% or $600 as a hold back. The car buyer will actually see an invoice from the manufacturer to the car dealership for $20,600.
Once the car is sold, the manufacturer will send the car dealership a check for the hold back, $600 in our example. This is just one way that the invoice a car salesman shows you may not actually be what it appears.
Dealer Financing
Buying a car is like a balloon. Have you ever seen that commercial on television? There are three or more sections to the balloon: the car price, your interest rate, and your trade-in.
If a car salesman needs to lower the price in order to get you to buy a car, he or she can make up the difference in one of the other areas such as earning a profit if you finance your car through the dealership instead of your local bank.
You should sell your own car yourself in order to get the highest price for it. It is the most cost efficient and effective for you. You can also secure your own financing for your car loan before you even head to the dealership.
The Car’s Real Invoice Cost
The government requires by federal law that the dealers show the manufacturer’s suggested retail price (MSRP) on the window sticker of brand new car sold in the United States. Most car buyers understand that this is typically a game that buyers and dealerships dance with each other.
Very rarely do dealers get full MSRP for cars that they sell. But, how do you find out the true cost that the dealership paid?
The first thing you want to do is buy the current issue of Edmund’s New Car Prices or Consumer Guide – Auto Series. These magazines will show you what the manufacturers are charging dealerships for certain models of cars and add-on options.
Understanding How Floor Plans Affect The Buyer
Many car buyers do not realize that car dealerships do not usually own all of those cars that they are selling us on their car lots. A floor plan is simply the loan that the car dealership gets either from the manufacturer or from its local bank to purchase the cars from the manufacturer.
When the car salesman sells you your new car, the dealership pays off the loan and keeps any difference as profit. This is the prime reason that dealerships try to sell you a car that has sat on its lot for a long time. They do this instead of requesting a brand new car directly from the factory.
Do you feel like you are taken advantage of when you buy a new car? Do you hate buying a new car? Do you know any additional car salesmen tricks?
Your dealer financing section is spot on (as are all your points). I worked in auto finance for many years, as a lender. It’s funny, you would expect to get a better deal when buying a car by offering to pay cash. But the dealer makes less money whn you pay cash and they’re likely to increase the price!
True story. I bought a car in 2004 with a friend who was very intimidating and after they tried to overcharge us he had a huge scene in the showroom. Everyone got nervous and tried to make him happy but they forgot to take the down payment. We left and when they figure it out 4 days later they asked to see the receipt and my friend said tell them your receipt is the car because you were escorted out with a handshake and a ton of papers. 🙂
I really don’t enjoy going through the car buying process. We made a BIG mistake the last time we bought a car. We picked it out and then when it was ready for delivery my wife went alone to handle the paperwork and all I did was show up at the end and sign where I needed to sign. I’ll never do that again! They talked her into all sorts of crap that we didn’t need for the car. Next time we buy a car we’re going into the dealership without a trade in and won’t discuss financing until we get a final price on the car. Once we know that we’ll make a small deposit to hold the car and then go get a cashier’s check for it. I sometimes wonder if “no haggle” places like CarMax are a better option than your local dealer?
I had no clue about the hold back! Thanks for pointing that out. Here I was feeling BAD for the dealership when they showed me their purchase price from the manufacturer – and it was the same as I wanted to pay. I ended up bumping up the price a little bit… knowing that they needed to make a profit. If I had of known that they might be receiving a hold back from the manufacturer, I might have been a little more stubborn!
these are great tips Hank!
WOW… I had no idea, especially about the holdbacks. We made the mistake – not once, but TWICE – of going to the dealership without setting up financing ahead of time. We’ve paid the price, literally. Won’t be making that mistake again!
Great article Hank!
Its interesting to see how dealerships make money. They have so much overhead that is always seemed impossible that they sell every vehicle below their cost.
Each month, car dealerships have an ongoing contest between themselves in a local area. They each want to be the top selling dealership. This applies to each make of car, Ford, Chevy, Toyota, etc.
To get the best no haggle price, pick out your favorite car, say a Ford Explorer XLT.
Then, tell the dealer that you
(1) are going to pay cash tomorrow, and that you
(2) will be shopping for the best deal from 2 other Ford dealerships in the local area, and you
(3) will expect their best price below invoice no later than the next day. Walk out.
Shop the other 2 dealerships for the exact same vehicle and tell them the same thing.
The dealership hates to lose to their local competitor, and they will make the deal.
Do this a few days before the end of the month, because they have contests to win for most cars sold in a month, and they will have another incentive to drop the price for you.
Once you get all three offers, go get your new car.
Car dealerships profit most when a buyer does not make a large down payment.
Many Americans do not think wisely when the select a car. They like to buy ones that they think will impress other people. They want to appear Virile and wealthy. Why do you think Mustangs and Corvettes are such big sellers?