How Used Car Dealerships Make Money

A car dealership is, of course, a business—and like any business, it cannot exist unless it makes money. You might assume you know how a car dealership generates a profit, but the reality of it may be surprising. Let’s take a quick look at the things that make a dealership profitable.

Where Do Car Dealers Make Their Money?

The common assumption is that car dealerships make the majority of their cash from, well, selling new automobiles. According to the National Automobile Dealers Association, however, that’s not quite right. The new vehicle department of a dealership accounts for just about 30 percent of that dealership’s total profits. That’s less than a third!

And what about used vehicles? Used vehicle sales account for even less of a dealership’s profits. According to the NADA numbers, the average dealership makes just 26 percent of its gross profit from used vehicle sales—just barely more than a quarter!

Of course, that leaves a pretty big piece of the pie still unaccounted for, which again begs the question: Where exactly are dealers making their money? If it’s not from automobile sales, then what’s left?

The answer: The service and parts department. For the typical automobile dealership, that’s where a whopping 44 percent of gross profits come from—making it even more important to the dealership’s financial state than direct auto sales!

Implications for Buyers

So what does this mean for the consumer, exactly? There are a number of potential implications, but one of the foremost is this: If you think that your auto dealer has a lot of wiggle room to negotiate the price of a car, you may need to think again.

If auto sales made up 90 percent of a dealer’s gross profits, we might rightly conclude that there were some pretty sharp profit margins, and thus a bit of room to haggle—especially where used vehicles are concerned. The reality paints a picture of significantly less room to maneuver. That’s not to say that you shouldn’t try to get a reasonable price, or that dealers can’t work with you some—but if you go to a dealership expecting to get a 50 percent discount, you’re just not being realistic.

Note that, if you want to know the true, fair value of a car before you go to a dealership, you can always consult with such resources as Kelley Blue Book or the NADA guidelines, both easily available online.

How Used Car Financing Works

As a closing note, let’s not forget the final source of income for the average dealership—the finance and insurance department, or F&I. F&I is becoming an increasingly big source of revenues for the average dealership, and at some dealerships these products—such as warranties, in-dealership financing, etc.—account for more than a third of the total profits.

All of this information should prove helpful to you as you seek a good deal from your local car seller. For more tips, of course, you can always connect with us at Get My Auto.