Thursday, March 6, 2008

How Dealer's Profit!

Just recently a friend of mine applied for a job at a local dealership for a finance manager position. The salary for the position was 100% commission on the back-end of the vehicle sales.

There are two ways that dealers make money on the vehicles they sale the front-end and the back-end. When referring to the front-end, let me give you an example of how this works. A dealer buys a car for $10,000 from a wholesale auction and then turns around and sells it for $12,500. The profit from the front-end of this transaction is $2,500.

However, in most scenarios dealers will offer additions to you on the back-end of the deal. Here are a few examples of back-end profit. If you get a loan from a local credit union referred to you by the dealer, they get a $200 spiff for the referral. If you decide to buy an extended warranty for $1500, they are probably making $500, paid to them by the 3rd party warranty company. In addition, if the dealer offers you GAP insurance (Supplemental Insurance), which they sell to you for $250, they will probably make that same amount. And last but not least some dealers will offer you exterior undercoating, that supposedly protects the paint from water-spots and other roadway junk for $150. The total profit on the back-end of this deal is $1100, giving the dealer an overall profit of $3600. If my friend would have accepted the job his goal would have been to sell $1200 on the back-end of each sale and he would have made approximately 15%-18% on each transaction.

Facts to remember when buying a car from a dealer:

-LOANS: If your getting a loan for the vehicle make sure you shop around the rate, the company the dealer is pushing on you is probably the one that cuts them a spiff for the referral, but not neccessarily the best company and rate for you.

-WARRANTIES: Most maufacturers provide warranties already, so make sure you do your research before you buy. Moreover, warranties usually don't pay back what you originally paid for them and sometimes cover things that are most likely not to fail. You'd be better putting the money in the bank and letting it collect interest until you need it.

-EXTRA'S: Such as exterior/interior protection coating. These things are fine if you desire them, but the cost to the dealer to put these things on your car is very minimal. So you can most likely work them into the deal for free or at a very low cost.

-MISC: There are always going to be special things the dealer tries to push on you, but they are probably things you don't need. So do your research and make sure you aren't adding negative equity into your car before you drive it off the lot.

Remember, even though the dealer is telling you that he is making minimal or no profit on the car he is selling you, they are either lying or planning on making money on the back-end of the sale. OTIS