How Car Dealerships Make Money
💰 How Car Dealerships Make Money (And Where They Get Their Cars) 🚗
Part of being a great negotiator is knowing how an industry works. At Deal Guard, most of us have never even stepped into a dealer as an employee yet we know more about the industry then 99.9% of sales people and sometimes owners! LOL
Ok, ever feel like you need a decoder ring just to understand how car dealerships actually make money? I was asked this question 24 times last week via direct message so I said I'll write something to help everyone get a better understanding.
This is not a complete list but is more than enough to make you dangerous!
Anyhow, you're not alone wondering how this industry works and how many ways dealers make money.
The system is designed to be confusing on purpose. Oho and by the way, most dealers are very wealthy and have made alot of money from consumers.
Never feel bad for them.
They do not feel bad for you for the most part.
In this guide I break down , more or less, how dealerships in the United States and Canada generate income—from the moment they get a car on the lot to the moment they squeeze every last dollar out of the sale.
I'm pulling back the curtain.
No flattery.
No dealer-friendly spin.
Just the raw facts you need to negotiate like a pro. 🤓
🌎 1. Where Do Dealers Get Their Cars?
🏋️ New Cars
New vehicles come directly from manufacturers (also called Original Equipment Manufacturers or OEMs).
Dealers don't own the cars outright when they arrive.
Instead, they finance them through what's called a floorplan loan.
Think of it like a credit card and only paying your interest on it monthly: the dealer borrows money to keep inventory on the lot and pays interest on it until the car sells.
Invoice Price: This is what the manufacturer charges the dealer. It's NOT what the dealer actually pays.
Manufacturer Holdback: Usually 2% to 3% of either the Manufacturer's Suggested Retail Price (MSRP) or invoice price. This money is returned to the dealer after the sale. It’s hidden profit.
Dealer Cash & Incentives: The manufacturer gives the dealer extra money to push certain models, especially ones that are hard to sell or nearing end-of-model-year.
Volume Bonuses: Dealers get bonuses for hitting monthly or quarterly sales targets. This is called stair-step incentive money.
So, even if a dealer sells you a car "at invoice," they're still making money and cry like they don't. 🤬 At times, they don't but there is always more to that story.
🚚 Used Cars
Used vehicles are sourced from:
Trade-ins: Dealers offer below-market value. They profit by reselling at a much higher price.
Dealer-Only Auctions: Vehicles are purchased at auctions like Manheim, using tools like the Manheim Market Report (MMR) to gauge current wholesale values. Now days new app are getting really good like Accu Trade.
Off-Lease Vehicles: Cars returned after a lease are often bought below market and resold.
Fleet Sales and Rental Retirements: Vehicles from businesses, government fleets, or rental companies.
Dealers often pay well below the resale value, giving them high profit margins on used vehicles. 🚫💸
🤔 2. How Dealers Make Money (Every Single Way Ish)
A. 🚗 New Vehicle Sales
Front-End Gross Profit: The difference between the sale price and the invoice price. Usually minimal—often under $1,500.
Manufacturer Incentives: Dealers receive bonuses directly from OEMs for selling specific models.
Holdbacks: Delayed backend money paid out after the sale.
Stair-Step Bonuses: Larger bonuses for meeting volume targets.
Financing Credits: Manufacturers often subsidize floorplan interest for a set time period (e.g., 60-90 days). If the car sells before the interest-free window closes, the dealer keeps the unused subsidy as profit.
B. 💼 Used Vehicle Sales
High Markups: It’s not uncommon for a used car to be marked up $2,000 to $5,000 or more.
Trade-In Arbitrage: Offer low trade-in values, then sell high. The difference is pure profit minus expenses.
Low Acquisition Cost: Many used cars are acquired at auctions or via trade for less than their retail value.
Reconditioning Costs: Dealers spend minimal amounts on cleaning and minor repairs, then justify large markups and charge for reconditioning. Do not pay it! You can vacuum your own car and a little Windex goes a long way.
C. 💳 Financing and Insurance (F&I) Products
This is where dealers make the most profit per sale up front. 💰
Interest Rate Markups: Dealers arrange loans through banks or credit unions, then add a markup to the interest rate. The bank pays the dealer a cut of the loan amount for this.
Extended Warranties: Often sold for $2,000 to $3,000 but cost the dealer $500 to $1,000.
Guaranteed Asset Protection (GAP) Insurance: Protects against depreciation in the event of a total loss. High markup.
Tire and Wheel Coverage, Key Replacement, Paint Protection: All sold at 100% to 300% markup.
Credit Life and Disability Insurance: Optional insurance products rolled into the loan, also heavily marked up.
Average profit in the F&I department can exceed $2,000 per vehicle sold. 📈
D. 🛋️ Add-Ons and Accessories
Window Tinting, Rustproofing, Floor Mats, VIN Etching: Sold at massive markups. NEVER pay for those!
Paint Protection Film, Ceramic Coating: May cost the dealer $100-$200, sold for $700-$1,500.
These are usually offered right before you sign—when you’re tired and less likely to say no. 🥴
E. 📄 Admin and Documentation Fees
Doc Fees: Often $300 to $900. These fees are pure profit after expenses. They have staff and make you pay for it. many businesses do. They just don't put it in your face like car dealers.
Admin Charges: Common in Canada. Sometimes regulated but still used to pad profits.
Delivery Charges: Sometimes listed as separate fees, even though they’re already included in the invoice from the manufacturer.
F. ⚙️ Service and Parts Departments
This is a long-term profit center.
Labor Charges: Charged at retail rates (e.g., $150/hr) while paying techs $25-$40/hr.
Parts Markup: OEM parts marked up 30%-50% or more.
Maintenance Packages: Sold at purchase or during service visits.
Warranty Repairs: OEM reimburses dealer; they often profit on the labor difference.
G. 👥 Leasing
Money Factor Markups: The lease equivalent of an interest rate. Dealers mark it up.
Lease-End Profit: Dealers can buy the car at the residual value and resell it.
Lease Protection Products: Just like with financing, all the add-ons apply.
H. 🌐 Reinsurance Companies
Some large dealers form their own insurance companies to underwrite warranties and GAP insurance. This way, they don’t just earn a commission—they keep the entire premium.
This lets them:
Earn interest on unused premiums.
Avoid claims payouts if customers never use the coverage.
Create long-term passive income.
I. 🚒 Fleet Sales and Business Accounts
Bulk Discounts: Dealers still profit through factory incentives and bonuses.
Minimal Negotiation: Companies don’t haggle like individuals. Easier money.
J. 🚨 Subleasing and Side Income
Rental Programs: Dealers run short-term rental or loaner fleets.
Subleased Space: Some rent space to body shops, car washes, or cafés.
Referral Programs: Earn money by referring customers to insurance brokers or finance companies.
📅 3. Summary: Who's Paying for All This?
YOU ARE!!!! 💥
Every single fee, markup, product, and upsell is designed to increase the dealer’s profit margin.
Even when they say, “We’re losing money on this deal,” they’re usually making it back in financing, warranties, or trade-in flips.
They lie all the time.
Not all of them but most.
If you want to walk into a dealership and actually negotiate a fair deal, you have to know where they make their money.
Knowledge is power.
Don't give it away. ⚡️
For help navigating all this without getting hustled, visit GETDEALGUARD.COM.
We handle the details so you don’t overpay, get tricked, or waste hours at a dealership.
Car buying doesn’t have to be a trap. 🛏️
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Catch you there,
Chase Jordan
