Secrets of Car Dealer Sales
There are profit streams underlying car dealer sales that most buyers are not aware of. It helps to know the terminology of car dealer sales. The invoice price is the starting point of what car dealers pay for cars, but other factors affect the net cost. Car dealers receive a “factory to dealer incentive,” a kick back that lets dealers sell cars at “below invoice price.” Rebates are offered by manufacturers to promote sales.
Dealers pay the same amount for invoice pricing, but they can get a different “special incentive” or “retro money” from the manufacturer. It is not accounted for on car buying websites. Sales managers will know this information, but not individual sales reps. Dealers are willing to sell at a loss so they can meet their sales quota and get their special incentive, which is $500 to $1,000 per vehicle. Some people wait to shop during a month’s last weekend when dealers are open to negotiation so they can meet their quotas.
An important factor is the back end profit a finance manger earns from a sale. They can make up for the loss on the “front end” sale by selling warranties, aftermarket products, and securing finance reserve.
Finance reserve is profit from the financing of a car. If you sign a contract at 6% interest and it is sold to a lender for 4%, the finance department gets a reserve check as an extra profit.
Another factor is “hold back money.” The manufacturer initially holds back this amount from the dealer. It protects a dealer’s profit margins from buyers negotiating at an invoice starting point. Hold back ranges from 2% to 7% of the Manufacturer’s Suggested Selling Price (MSRP).
Consider the following tips when buying a car:
- Get a copy of your credit report online with an “auto score” option. Dealers use this to determine the interest they will set a contract at and what lenders will buy the contract for. The manufacturer supplies the best interest, so you must pass up any rebate money to get it.
- Browse car shopping websites to learn the invoice price of the car you are buying.
- Learn from dealers and/or online what the factory-to-dealer incentives and rebates are.
- Avoid negotiating payment since dealers distract buyers from a car’s true selling price. Though the payment may be lower, you may pay the car’s full sticker price.
- Get a printout of the sale with the selling price, tax, license, and other fees. Question each fee so you understand what it is and if it is necessary.
- Avoid buying extras. Have the finance manager show you his “bank book,” which lists the best interest rate for your credit score.
- Buy an extended warranty if you will keep your vehicle beyond the manufacturer’s warranty. Find out for how much over their cost will they sell their warranty and aftermarket products.