Ever heard how most restaurants just break even on entrées, making their biggest profits on drinks and desserts? It's a similar system at most car dealerships, say auto industry experts.
"Consumers focus too much on the cost of the vehicle itself," says Phil Reed, senior consumer advice editor at Edmunds.com. "Buying a car is really a series of transactions, with lots of ways for the dealer to make money."
And, surprisingly, of all the things that are huge profit centers for car dealers, the actual vehicle isn't one of them. According to various industry sources, dealers often make less than $1,000 on a $30,000 vehicle — a paper-thin margin. So just because you held your ground to pay well below sticker price, don't think your work is done.
It's everything else that can truly make or break the deal for you and the dealer. So it's well worth your time to study up on every aspect of car buying before visiting the showroom.
Here are six areas where traditional car dealerships pull in the most profit. And, according to Howard Krueger, manager of internet auto sales at USAA, "Everything's negotiable."
The Trade-in
Many new-car buyers complicate their transactions by trading in their old vehicles. "Mistake No. 1," says Reed.
"Some dealers want you to think they're doing you a favor by taking the old car off your hands," he says.
They'll offer a low-ball price and then sell it on their used lot for a tidy profit.
If you're asked about trading in your current car, consider saying you haven't decided yet, and later negotiate a trade separate from your new-car purchase.
You can often fetch the highest price from an individual who really needs your used car. And if you're willing to sacrifice some money for convenience, consider selling to a different used-car dealer, such as CarMax.
Before you do, research the estimated market value of your car through a service such as Kelley Blue Book or NADA Guides. A CarFax report may also add value to your trade-in if you can show that your vehicle has not been in a wreck or had any structural damage.
By selling your old car outright, you can approach the dealership with a down payment in hand and one less thing to haggle over.
The Luxuries
Say you love the car with the "emerald sea" exterior and "desert mystery" interior. Trouble is, the only one on the lot comes loaded to the hilt with premium sound, navigation system, heated seats and a dozen other extras you could live without. The dealer hopes you'll simply accept these unwanted upgrades, so you can take your baby home today. Don't make it so easy on them.
If you can wait a few months for a new car, you might be able to custom-order a vehicle to your exact specifications (though it may limit your influence when negotiating on price). You can also search dealer inventories online to find your more practical dream car at another location. It might cost you a transfer fee, but dealers are often willing to swap vehicles if it suits them both. Or, if it saves more money, take a road trip and do business with the other dealership directly.
The Financing
Things can get really tangled when you enter the dealer's finance and insurance office, known as F&I in the industry. An attractive price on a vehicle can be offset if you accept an inflated interest rate or a confusing balloon payment. The "keep it simple" mantra applies here too, so it pays to check out financing options ahead of time.
"Shop around and get preapproved for an auto loan from your bank first," says Krueger.
This strategy takes financing out of the equation when you're negotiating the sale price. Then, if dealer financing is still the best offer, go for it.
In some cases, you may be required to use dealer financing to cash in on a big manufacturer rebate. If that's the case, consider refinancing the loan to a lower interest rate once you have purchased the vehicle.
The Insurance
The other half of the F&I manager's job is to sell insurance (yes, he works on commission, just like the car salesman). And when you sit at his desk, you're sure to receive pitches for several types of coverage.
These include:
- total loss protection (aka gap insurance), which covers the cost if your car is totaled or stolen, but youstill owe more on your loan or lease than your auto insurance will pay.
- credit life insurance, which pays off your auto loan if you die prematurely.
- accident and health insurance, which covers your car payments if you're injured or sick.
As with any insurance policy, there's no one-size-fits-all solution. Talking to your insurer or bank before you go to the dealership to compare prices is the best way to get the most protection for your money.
The Extended Warranty
The typical manufacturer's warranty covers most repairs to a new car for three years or 30,000 miles, whichever comes first. For a price, an extended warranty can stretch that protection further into the future. On this topic, Reed and Krueger agree on two counts: Extended warranties can be beneficial, but (as with most "aftermarket" products) you can usually find a better bargain outside the dealership.
Is an extended warranty right for you? One key factor to consider is how long you plan to keep the car. "If you plan to drive the car until the wheels fall off, an extended warranty might be right for you," says Steve Thompson, assistant vice president of USAA consumer product management. "But if you know you’ll sell the vehicle before the original warranty ends, then it might be an unnecessary expense."
"Take the extra step to get competitive offers," says Reed. "An hour's worth of research could save you $2,000."
Just be sure, adds Krueger, to compare apples to apples when considering terms and deductibles. Dealers often reduce coverage to beat a competitor's price.
The Bells and Whistles
Need some mudflaps for that new truck? Your auto dealer would be happy to sell them to you at a hefty markup. You'll also have the option to buy pinstriping, window etching, paint sealant, fabric protection and a catalog full of other add-ons, all of which cost you hundreds, but add little value to the car. Still, it's so convenient to say yes and roll the extra costs into the loan.
A better idea, says Krueger, is to "go to the auto parts store and buy some Scotchguard and Turtle Wax for five bucks."
For would-be car buyers, the message is clear: Know exactly what you need (and what you don't), shop around for everything and drive away a winner.
