3 ways car dealerships make money off of you

Published on February 19, 2014 By Lauren

Yesterday Mark wrote a post about buying a new vs used car – and today we are going to talk about some of the tricks to be aware of when buying a new car at an auto dealership.  We had a reader who used to work at a car dealership write in a few weeks ago, she shared some of the tricks that car dealerships use to make money and I did some research today on these as well.

1.) They can make money off you by charging you a higher interest rate.

Car dealerships can legally charge you an extra 3% on top of the lender’s interest rate, this is referred to as a dealer markup.  The car dealership acts as a middleman between you and the lender.  That means if the bank can give you a 17% interest rate, they will come to you and say they can offer you a 20% rate.  Negotiating them down is always encouraged, but know that whatever they come down in the rate comes out of their pocket… so expect push-back.

My recommendation would be to go to a bank first and see what they can offer you for financing your car, then if you want the convenience of the dealer doing all the legwork for you, ask them to match that interest rate.  You should also know your credit score before going into the dealership, that way they can’t tell you that it is something lower than it really is.  You can get a FREE credit report from Credit Sesame without any credit card information here.

2.) They make money off of charging you more for your warranty.

Dealerships get warranties for cost and they can charge whatever they want to as long as the bank approves it.  Often, the dealership will mark the warranties up at least $1,000.

One of the biggest places that car dealerships make their money is by selling you Extended Service Contracts (extended warranties).  Additionally, most service warranties cover things that are never likely to break (source) and are often not backed by the automaker.

3.) When you look at the sticker on a new car, it tells you the Manufacturer’s Suggested Retail Price (MSRP). This is not the price you should pay.

Dealers pay a certain invoice price from the manufacturers for a car, then mark that car up thousands of dollars and put that price on the sticker on the car labeled as the MSRP.  This is the price they want you to pay, but you have a lot of wiggle room to negotiate with them.  The dealer also gets incentives from the manufacturer for buying cars (think of it as a type of mail-in rebate), so even the invoice price is inflated when you consider those incentives.

Don’t let them negotiate you with a monthly payment price, negotiate with them for the purchase price of the car instead.  They can hide even more fees in the monthly negotiations than they can with the whole purchase price.  After the purchase price has been agreed upon, then discuss financing if needed.

For more information on websites to use and ways to find out the incentives your dealerships are getting Bankrate.com has a great article about how to research a car invoice price here.

Keep in mind that the condition of the car and your geographic region make a big difference, so this information can really only serve as a general guide.

I learned a lot while doing some research for this article, and feel like I am a better educated consumer because of it.  Thanks to the reader who wrote in on these tricks!

Does anyone else have any tips or tricks on how to negotiate with the car dealerships?


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