Dealers have quite a few different profit avenues – they aren’t hurting for money, there’s no question about that. So, how do dealers profit? Let’s take a look:

  1. Price of the new car – This is the number one place where dealers make their money. Any amount over invoice that the dealer can get is profit.
  2. Your Trade-in – If your trade is worth 15,000, but the dealer gives you 14,000, then he just made an extra thousand dollars in profit – not too shabby. For him, that is. It’s not so good for you.
  3. Financing – Dealers are paid a flat fee from the banks for each contract they send over. That’s why they try very hard to earn your financing, even if they can’t offer you a better rate. Also, they make money doing something called “point spread”. Say their bank approves you for 6.5%, but the dealer signs you up at 8.5%. They just made a 2 point spread on you. On a $20,000 car this can be huge – almost $1500 in added profit for the dealer.
  4. Unnecessary Add-ons – Paint and fabric protection, sealant, rustproofing, VIN etching.. I can hear you nodding your head – you’ve seen these things before. Not only do you not need them, they are almost pure profit for the dealer. I’ve seen dealers charge as much as $1,000 for paint and fabric protection. The paint sealant is nothing more than wax, and the fabric protection is a can of Scotchguard. You’re better off handling these items on your own.
  5. Extended Warranties – All dealers offer extended warranties on the cars they sell, but the prices vary wildly. Extended warranties are not a bad idea at all – in fact, they are often a very good investment. However, you must be careful not to pay too much. For the exact same warranty that you could purchase online for $700, you could pay as much as $2000 at the dealer – or $1,300 too much.
  6. Dealer Prep – A bogus fee that many dealers tack onto the contract. Some dealers charge as much as $600 for a dealer prep fee – they say it covers their costs in detailing the vehicle, inspecting it, and filling it with gas. Wrong! Nearly all manufacturers cover the costs of inspecting and gassing the new vehicle. This fee is bogus. If it’s $600, ask them to reduce the price of the vehicle by $600 ( They can’t just remove it from some contracts, without removing it from all of them. ) Don’t pay this fee, ever.
  7. Doc Fee – Some states of regulations in place governing the amount that a dealer can charge for a Document (Doc) fee. This is supposedly to cover all the paperwork involved with the vehicle purchase, such as registration, titling, and payoff. $50 should be plenty for this fee – any more, and ask for an additional discount on the vehicle. I’ve seen doc fees well into the hundreds – don’t pay that much!
  8. Holdback – Nearly all manufacturers send dealers a quarterly payment, based on the vehicles that they sold. Each vehicle has a “holdback” amount, which is a percentage of either invoice or MSRP, depending on the dealer. On some cars, this can be well over a thousand dollars – all profit. So when a dealer agrees to sell you a car at invoice, and pretends like he’s losing his shirt, you’ll know better.
  9. Floorplan Assistance – Some automakers go above the holdback, and offer something called Floorplan Assistance. This is designed to help offset the costs of the dealer carrying inventory. At the end of the day, it’s yet another profit avenue for dealers. A few hundred dollars per vehicle can add up very quickly when you’re talking about a large volume dealer and hundreds of vehicles.
  10. Adjusted Market Value – Sometimes you’ll find a dealer who has the nerve to add an Adjusted Market Value sticker to some or all of the new vehicles on the lot. Let’s say MSRP is $26,000 – the dealer sticker price may be $28,000. That’s a $2,000 AMV, and it’s 100% pure profit. Don’t ever pay more than MSRP – you should rarely pay as much as MSRP.