(I am not going to be on of these commentators that makes you read the whole article to find the answer, which is imbedded in one of the last paragraphs. But it would be smart to read the whole article to truly understand what you need to do.)

The Answer: Know how the dealer makes its profit, and how much profit it is making on your car. To find this out keep reading…

  1. Know where the car dealer makes its money: In an investigation into the hidden side of any business you want to “follow the money.” The following are those areas in a “simple” car purchase where the dealer intends to make money off of you.[1] As I learned when investigating the cost of my wedding, remember, “Everything Is Negotiable.”
  • Where they make money on selling a vehicle: The profit on the vehicle being purchased is the one area in which people know to negotiate. But most do not know how much profit is being made by the dealership.
    • New Vehicles: The “invoice price” is the price the dealership paid the manufacturer for vehicle and can be discovered by using one of the several car purchase services, such as Consumer Reports, etc. If you purchase a car at or near the invoice price then you know you have gotten a great deal. The average dealer profit on just the difference between the price the dealership paid for the car and what the car was sold for is $700-$1000.00. The “invoice price,” however, is not the entire story on how the dealer makes its profit. In addition to the invoice price (profit incentive), dealers also receive incentives from the manufacturer to sell the car. The most widely known incentives are Dealer Holdbacks and Cash Incentives. There are many other types of holdbacks and dealer credits that may or may not be disclosed to the public. These can include advertising credits, flooring assistance, floor interest reserve, floor plan allowance, transfer balance, wholesale reserve, and wholesale credits. For the sake of brevity I will discuss the two most well known.
      • ​​Dealer Holdback: Dealer Holdback is money the manufacturer permits the dealer to hold back or make which is 2 or 3% of either the invoice or MSRP (manufacturer suggested retail price) sticker price, depending on the manufacturer. You can even go to Edmunds.com for the percentage held back for each manufacturer. This dealer holdback allows the dealer to make a profit even when it claims it sells the vehicle at the invoice price. For example, if the car’s MSRP is $25,000 and the dealer holdback is 3% then the dealer will receive $750 from the manufacturer whenever that car is sold. Once dealer holdbacks became standard practices in the industry, manufacturers started increasing their invoice by the amount of the dealer holdback.
      • Cash Incentive: When cars are not selling well manufacturers will sometimes offer cash incentives of as much as $2000 for the sale of each of these models, but only let the dealer know this. This permits the dealer to claim they are selling the car for a loss while still making a substantial profit.
    • UsedVehicles: There is no “invoice price” that can be easily discovered like on new vehicles. The price you want to know is how much the dealer paid for the vehicle you are considering. The dealer’s initial cost in the vehicle is the price it paid to purchase the car plus any repairs or reconditioning costs it paid to put it into its current condition. Dealer’s claim that a profit of $5,500 is a nice profit. I’d say it is! People simply do not know how much the dealer paid or the cost of any repairs made on the used car, thus the lack of information translates into increased profits. This is why dealers make much more on used cars than the new ones. The best advice I can give is to use the buying service that Consumer Reports has for advising what the vehicle you are interested in buying is selling for in your area. You can also check out Edmund’s True Market Value (TMV ®). Thoroughly researching what the car you want is selling for in your region is the only way to arm yourself with the information you need to make a good deal.
    • The Trade In: Like the value of the used car you are interested in, you need to know what your trade in is worth. You can get a decent understanding of what your trade in is worth by checking the NADA Used Car Guide or Kelly Blue Book values. The dealer will try to low ball the trade in value since the more it has to pay you the less profit it makes, not only on the purchase of your new car, but also when it tries to sell the trade in. (Be careful, that if the dealer offers to pay you in the same amount as the payoff of the loan you have on the trade in, which is more than the vehicle is worth based on your research, make sure that the dealer does not add money to the price of the car. If it does this you will be paying more sales tax that you should since the dealer has added the amount it inflated the trade in value to the price of the vehicle you are buying.)
    • The Financing: You need to know what interest rate your credit qualifies you for since the dealer may try to get you to agree to a loan at a higher rate. So, before purchasing the car try and get your own loan or at least find out from another lender what your interest rate would be, so when you go to the dealership you know the rate you should be accepting. For example, if you find that your credit qualifies for a rate of 8% and the dealer comes back saying he can give you a rate of 12%, you know that you should not accept that rate and he is inflating the rate. If the dealer can get you to agree to that 12% the dealership will keep the majority of the additional interest payments. You can also always ask the dealer if it is inflating the interest rate ABOVE the rate approved by the lender, and ask for the approval of your loan so you can see what terms the lender was willing to loan you the money for.
    • F&I Products: GAP Insurance, Life Insurance, Extended warranties, and fabric protector are all good examples. All of these products are optional, and the prices are negotiable. The dealer makes hundreds of dollars from each of them. The extended warranties usually will not cover any problems currently existing with the vehicle at the time of purchase. The solution: get the dealer to advise you, IN WRITING, that the vehicle has no time of purchase, since if there is one, and it does not manifest itself until after purchase, the extended warranty does not have to cover it. Extended warranties cost the dealers $200-$750, and they sell them for thousands.
  1. Who shares in the profit? – Traditional sales staff is paid a commission based on the profit from the vehicle, and the more profit the higher the commission percentage is. The Internet sales manager, however, earns a salary plus a commission or bonus based on volume.
  2. How much do they make? – In “Confessions of a Car Salesman” Chandler Phillips stated, “Commissions were based on the ‘payable gross’ to the dealership and were applied in three tiers. If payable gross was from $0-$749, our commission was 20% of the profit; from $75 to $1,249 the commission was 25% of the profit. Above $1250 the commission was 30% of the profit. In other words, the higher the profit for the dealership, the higher the commission I would earn.” To get to a higher level, might mean increasing profit by financing sleight of hand. Thus, if you buy from the Internet manager, rather than the salesman, you might be better off.
  3. What is the DEALERSHIP #1 Weapon: Your emotions. If they can get you buying on impulse or because you “have” to have that car, then they’ve got you. If you go into a dealership without the information I have mentioned above, then you are at a huge disadvantage since you have no idea what the vehicle should really sell for.
  4. What is YOUR #1 Weapon?: Information. Information on how much money the dealer is making on that car you want. Figure it out, and you will have the confidence of knowing what that car is worth, and, unless the car you want is so popular that the dealer knows he can sell to some other sucker in a couple of hours, you should be prepared to walk out. I took this advice and walked out after making a fair offer, expecting for the salesman to come running after me. He did not. I was very disappointed and regretful of my faith in this system. But then the next day he called, and offered me the price I wanted.

Good Luck!!


[1] There is nothing wrong with a business making money. Indeed, that is how our free market system works, a system that has made us one of the wealthiest countries in the world. But in this game of car sales your goal is to pay as little as possible for the best car you can afford.