How Do Car Dealerships Make Money? |

Knowing the Dealer

Car dealers are people too

Illustration of man about to shake hands with car salesman

A recent poll of Americans found that they rate the car buying as one of the worst experiences around, next to stubbing your toe on a cabinet or a root canal. But we don't believe that it has to be this way, not with the internet changing the way that people buy cars and putting more information than ever in the hands of consumers. We want to put you in the best purchasing position and are here to tell you a few things you might not know about dealers that will help you during your negotiations.

And please remember — car salespeople are human too, they're just like anyone else trying to make a living. The majority of people we've dealt with at dealerships are decent folk (though there are a few bad apples out there). Most would even say that they appreciate someone who knows their stuff, because it makes for an easier negotiation. One final note: if you feel like you're being mistreated at a dealership, simply walk away and go to another one that will be happy to have your business.

Here are a few things that are important to know before you walk into a dealership:

1. How Does the Dealer Make Money?

There are several ways that a dealer makes money off of your new car purchase.


Even if the dealer sells you a car at the invoice price, he is often still making money due to a little-known thing called a holdback. Holdbacks are compensation that the dealer receives from the manufacturer when they make a sale, usually at a rate of 2-5% of the MSRP. Thus, a dealer can make between $400-1,000 off of your purchase without even haggling with you. But you are not entitled to the holdback, so don't even try to wrangle any of this money from the dealer when negotiating. You shouldn't even mention it unless they complain that they're not making any money off of the sale.

Factory Rebates

Similar to holdbacks, these are bonuses that the manufacturers give to the dealers to help them move specific cars.


As we covered in our Auto Financing section, getting the best deal on your financing requires some homework. If you don't know what kind of rates you qualify for and visit a dealership, then the best financing they offer you will be the best you can get. It could be that the dealer's financing arm will offer you 7% APR but at other places they could offer you 5%. But without knowing in advance what rates you can get, there's no way to know. This is just another in a long list of reasons to either get pre-approved for your own financing before you visit the dealer, or at least know what rates and terms you qualify for.


It's also important to know how much money you can expect to get for your used car, whether you choose to sell to a private party before you reach the dealership or trade-in. If you are going to trade-in, have several estimates for your trade-in so you can get the maximum for that old set of wheels; it will give you a leg up on the new set.

2. Things Not to Say to the Dealer

  • Don't negotiate for a monthly payment, negotiate on the full price of the vehicle, out the door. That way you know exactly how much it will cost, rather than approximating with loans and interest calculations; keep it simple.
  • Don't talk trade-in until you have negotiated the price, that way you will get the best price for both your new car and your trade-in. There is an exception to this rule: some manufacturers will offer a rebate for new car buyers that are also trading a car in. In this case, mention that you have a car to trade-in so the dealer knows you qualify for that rebate, but still conduct both negotiations separately.

3. Everything is Negotiable

What most people don't know is that all of the options that are available can be negotiated. The prices of all of the little extras such as extended warranties, paint protection, LoJack, rust proofing, floor mats, etc. are not set in stone. I remember buying a new car and the dealer wanted us to chip in a marketing fee which I refused and the fee was waived.

BOTTOM LINE: Look at the car buying experience as a game. The dealer is the other team and the car is the trophy. The majority of dealers aren't bad people — they just count on consumer being uninformed. In order to be successful at anything you must be informed. Knowledge is king and if you know the dealer's tactics, you can win the car-buying game.

Ready to buy? Get a price quote before visiting the dealership.

  • Get multiple quotes
  • No cost, no-hassle negotiation
Back to Top