Buzz
Purchasing a car is an inevitable part of life for most of us. Whether opting for a new model or a pre-owned vehicle, the process often involves interacting with a dealer. This guide aims to empower you to save money by highlighting common tactics dealers use to boost their profits at your expense. Feel free to share additional car-buying tips in the comments section.
10. Price Inflation
One of the most straightforward methods dealers use to earn a profit is through price inflation. Typically, the gap between the dealer's cost (invoice price) and the manufacturer's suggested retail price (MSRP) ranges from 5% to 10%. While this percentage might seem modest, the actual profit can be substantial given the high price of vehicles. For instance, a car costing the dealer $30,000 can yield a profit of approximately $3,000. When this profit is multiplied by hundreds of cars sold each month, a dealer can amass nearly a million dollars monthly solely from mark-ups.
9. Hidden Profits: Hold-Back and Advertising Fees
When a dealer sells a brand-new vehicle (not used), they report the sale to the manufacturer through a process called RDR. This notifies the manufacturer that a unit has been sold. In return, the manufacturer compensates the dealer with a predetermined sum for 'hold-back' and advertising costs. These amounts are discreetly noted on the invoice, often in a cryptic format that makes it difficult for customers to decipher. For instance, if a savvy buyer insists on paying only a specific percentage above the invoice price, this percentage is based on the pre-deduction invoice amount, excluding hold-back and advertising fees. Once the sale is finalized and the contract is RDR’d, the manufacturer reimburses the dealer a significant sum, sometimes as high as $1500.
8. Lowballing Trade-In Values
When trading in a vehicle, dealers often undervalue it to secure an instant profit and another when the car is resold. The immediate gain stems from the ACV (actual cash value). For example, if a car's true value is $11,500 but the dealer offers only $10,500, they pocket $1,000 upfront. To avoid this, understand where dealers source their appraisals—commonly from Black Book or Manheim Auction Reports. Dealers rarely align with Kelly Blue Book or NADA values. Additionally, dealers profit further by reselling your trade-in. After purchasing your car for $10,000, they invest in servicing, detailing, and insuring it before listing it for $13,999. The final sale price depends on the buyer's creditworthiness. For instance, if a car's book value is $13,125 and the buyer has excellent credit, lenders may finance up to 135% of the value, allowing the dealer to sell it for over $17,000 and earn a $7,000 profit. Conversely, buyers with poor credit may receive less financing, forcing the dealer to accept lower profits or require a cash down payment.
7. The 4-Pack Strategy
Both new and used cars are subject to a 'pack,' an additional markup beyond the standard profit margin. This fee typically benefits the dealership owner. While the pack amount varies by dealership and vehicle type, it rarely falls below $500 and can reach up to $1,500. For example, if a dealership sells 250 cars monthly with an average pack of $1,000, the owner earns $250,000 monthly—totaling $3 million annually from packs alone.
6. Customer Service Fees
This fee is arguably the most deceptive of all. Dealers claim it covers administrative tasks like processing paperwork, handling tags, titles, taxes, and providing loaner cars. While these tasks do incur some costs, the fees charged—ranging from $299 to $699—far exceed the actual expenses. Most of the work can be completed quickly via phone, internet, or fax, leaving the surplus to pad management's profits.
5. Bump-Stickers
This is a highly unethical practice. A 'bump sticker' is a fake label placed next to the manufacturer’s window sticker, displaying a higher MSRP than the actual price. Dealers justify this by claiming additional services like paint protection, fabric treatment, window etching, or prep work such as detailing, servicing, and inspections. They may also argue the car is in high demand, warranting a markup. In reality, this tactic is misleading. Once the inflated price is negotiated down, buyers believe they’ve secured a significant discount, but they’ve merely paid the true MSRP—hardly a bargain.
4. Service Contracts
Once a customer agrees to the terms, they proceed to the F&I (Finance and Insurance) office to finalize the deal. This is where legal documents are signed, but it’s also a major profit center for the dealership. One of the most lucrative products sold here is the Extended Service Contract, often referred to as an extended warranty. These contracts frequently cover components that are unlikely to fail, and customers must pay a deductible each time they use the warranty, on top of the initial $1,400 cost. The markup on these contracts is usually regulated by state laws but often doubles the original price. While these agreements are typically refundable on a prorated basis, opting for a certified pre-owned vehicle is often a better choice, as it comes with manufacturer-backed coverage, unlike dealer-backed warranties that lack the same level of accountability.
3. Holding Points of Rate
This practice is another reason car dealers often face criticism. When a sales manager submits your loan application to lenders, they receive a 'call back' detailing the loan terms, such as the approved interest rate (buy rate). For example, if the buy rate is 7.9%, the dealer can legally increase it by 2 points, charging you 9.9% instead. The bank then pays the dealer the difference, pocketing significant profit. To avoid this, always ask to see the lender's call back and compare it to the rate you're offered. If the finance manager refuses, they're likely hiding the markup.
Contributor: Kay Jay
2. Down Payment
Buyers with good credit should rarely need a down payment for a new car, except in cases like excessive negative equity or a desire to lower monthly payments. However, dealers often claim lenders require a 20% down payment or insist taxes and fees must be paid in cash. This is typically untrue. Securing financing through a personal bank or credit union beforehand can prevent such tactics. Additionally, payments listed with a down payment can often be maintained without the upfront cash, as down payments usually translate to pure profit for the dealership.
1. Gap Insurance
Gap insurance is a product I highly recommend—it can be invaluable. However, purchasing it at a dealership for $599 is unnecessary when your local credit union offers it for just $150. Gap insurance covers the remaining loan balance if your car is stolen or totaled. While your insurance company pays only the actual cash value (ACV), Gap insurance covers the negative equity. For instance, if your car is worth $11,000 but you owe $16,000, your insurer pays $11,000, leaving you responsible for the $5,000 difference. Gap insurance steps in to cover this gap, allowing you to move on without financial burden.
