How Used Car Dealers Make Money

Used Car Dealers

How used car dealers make money is a mystery to many consumers. It used to be a closely guarded secret, but that has changed. With an education about how car dealerships make money, you can make an educated decision when buying a used car. You’ll be better able to negotiate and get the best price.

New cars are the biggest profit center for dealerships, but used cars represent less profit. Dealers typically refurbish used cars in-house to increase their part-and-service sales. Compared to new cars, used cars are cheaper to purchase than new ones. However, the competition for used cars is much tougher than it used to be.

Used car dealer make money through the sale of other financial products, such as warranties and insurance. By offering these products, they can make a significant profit. This includes the sale of insurance and extended warranties. Good finance managers are like gold in the car business, and dealerships invest in technology to improve F&I margins.

How Used Car Dealers Make Money

Most dealers take out loans to stock their inventory. The manufacturer provides holdbacks of about one to three percent of invoice price to dealers. That means that a typical dealer pays $350 per month in finance costs and another $700 for holdback costs for each vehicle. If the vehicle sells quickly, the dealer makes a profit on the holdback.

Typically, used car dealerships make between $500 and $3,000 profit per vehicle. The average used car spends 60 days in a dealership before auction. In addition to the trade allowance, the dealer pays commissions for selling a used car. Additionally, used car dealers earn more profit when they sell cars that are ten or less years old or have fewer than ten thousand miles.

Repairs are another major revenue stream for car dealerships. In fact, nearly a third of dealership profits come from repairs. A typical dealership service department performs warranty work on a daily basis. It is expensive to run a service department and the service advisors are paid on commission. Routine service and parts replacement also earn the dealership a profit. Furthermore, dealerships sell wholesale parts to independent garages and retail parts to customers.

Another avenue for making money from used car dealerships is through financing. Dealers can increase their profits by offering finance products, insurance, and other services. This allows them to mark up the interest rates of their loans by about 2.5 percentage points. However, this tactic is not entirely illegal. A recent study by the Massachusetts Institute of Technology showed that 78% of dealer-arranged loans carry marked-up interest rates.

Another way used car dealers make money is from the trade-ins they get from car owners. Car owners often trade in their old vehicles without purchasing a new one. However, because of inventory constraints, this can be challenging for some dealers. In such cases, dealers may offer a trade-in for a fraction of the original cost.