Understanding how car dealerships make a profit will help you get the best deal on your new or used car purchase. Spending several hours haggling to get the price of a new car lowered won’t result in much of a savings if you let yourself get gouged by financing, insurance, or service repairs. Take a look at these eight ways car dealerships make a profit before you head out to buy a car. You’ll be prepared to say “no” to costs that are unnecessary and negotiate the expenses that are.
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Financing:
Dealerships offer their own financing plans, usually with interest rates much higher than what you would pay on a loan from your personal bank or credit union. And dealer financing deals can be confusing and even misleading. So it pays to shop around and bring a pre-approved loan from your bank with you when are ready to visit a dealership and buy a car. Knowing your FICO scores and the average car dealership interest rates for your area will also help you negotiate the best deal for financing your purchase.
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Insurance:
The manager of a dealership’s financing and insurance office works on commission. So it is in his or her best interest to sell you coverage, even if you don’t necessarily need everything included in the policy. You do need some kind of car insurance before hitting the road, and if you’ve never had insurance before, your choices outside of a dealership may be limited. Talk to and compare prices offered by insurers such as GEICO and Allstate before you head to a dealership. You’ll be better prepared for a dealer’s insurance pitch, and to negotiate the most protection for your money.
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Trade Ins:
Car dealers love it when you show up with your old car, ready to trade it in for a new one. Generally speaking, they’ll try to offer you the lowest price possible, and later sell it for a nice profit. Before bringing your car to a dealer, research the estimated market value of your car on the Kelley Blue Book or NADA guides websites. Run a CarFax report on your car, which will provide any buyer with a detailed history of your automobile and driving history (i.e. whether or not you crashed it). You should also consider selling your car yourself, which will provide you with some ready cash for a down payment.
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Dealer documentation or “Doc” fees:
Dealer documentation or “doc” fees covers a dealer’s administrative costs, including processing title and registration, filing, and other clerical tasks like stapling your paperwork together. It’s a non-negotiable fee, so before signing anything, ask how much you’re going to be charged. Be aware that in some states there is a cap on doc fees. If the fee is higher than $100 (and often it will be more than $300) use this as leverage for negotiating a better overall deal.
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Extended Warranty:
An extended warranty is a comprehensive plan that extends beyond a car’s factory warranty. Extended warranties include factory and third-party extended warranties. If you anticipate owning and driving your car past the expiration of the factory warranty, you’ll probably want to consider some kind of extended coverage. Edmunds recommends you purchase a factory extended warranty over a third party, keeping in mind a dealer will push whatever warranty will give them the highest profit.
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Bells and whistles:
“Add-ons,” sometimes referred to as “bells and whistles” or “luxuries,” can include window etching, rust-proofing, fabric protection, paint sealant, and pin striping, all of which will cost you hundreds of additional dollars and add little or no value to your car. Some dealers will try to convince you they are using special chemicals and high-end products to improve the look of your car and protect it against bad weather, when in fact they’re reaching for a can of scotch guard or turtle wax. If a dealer tells you that an add-on such as “rust proofing” has already been applied to your car without your consent, refuse to pay for it.
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Used cars:
Industry sources say a dealer makes, on average, about $1,000 profit on the sale of a new car. In contrast, dealers can profit by several thousands when selling a used car. Since you won’t know what a dealer paid for a used car you’re considering buying, research the car’s market value in advance through a website like Edmunds. At the very least, you’ll know approximately how much the dealer is jacking up the selling price.
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Service bays:
Service bays, which are service departments connected to and partnered with car dealerships, have kept many dealerships solvent throughout the current recession. Unfortunately, service managers are often quick to try and convince you to agree to “repairs” and tuneups, including oil changes and fluid flushes, before they’re actually needed or that are completely unnecessary. Understanding the basics of car safety and maintenance, as well as locating a good, reliable auto service shop other than the one connected to your dealer, can save you a lot of money.
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