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Starting a Used Car Dealership Business With No Money – A Complete Guide
Standing outside a car dealership reveals an armada of shiny new vehicles. If you could look behind the curtains of the dealership, you would discover that each and every operation you are passing by is set up as a profit center—all of them competing for the money in your wallet. So who typically wins this war of dollars, and how does the dealer actually make any money? The answers might surprise you. Big dollars, factory fresh complete with that new car smell —you would think this is where the big bucks are kept, and in many ways you are correct. Because they are a high-ticket item, new car sales account for over half of the total gross sales at the dealer. Dealers secure inventory by borrowing money, sometimes from the carmaker, to get all those cars into the showroom and onto the lot. The longer the cars sit, the more interest the dealer has to pay on the loan. Cash flow, yes. Profits, no. More studies from NADA recommend that used cars sell in 45 days or less. If they sit longer, they are losers. Back in the old days, the car business was much less transparent. Car values were determined and published in books that were available only to dealers. Or course, all the numbers were subject to the condition of the car. The dealer would make good money on the trade and the sale of the new car. Those days are long gone. CarGurus can tell you what your trade is worth in a couple of clicks on our Car Values page, and a quick search will allow you to compare prices for the same car at multiple dealerships and from private owners. Dealers buy and sell cars at auto auctions. Auctions can be sexy affairs filled with collectible cars and rich people—or they can be held by police departments or the IRS. Auctions are risky propositions even for the professionals. Dealers may take cars to auctions that have been on the lot too long or are too expensive to fix. Dealers may buy cars at auctions if they have room in their inventory for certain quick-selling models. Pure capitalism, risk and reward: Auctions are not for amateurs, and even savvy car dealers can make costly mistakes. These are yet another risky-at-best potential profit center.
My Recommendation for Car Shoppers
Generally, dealerships make the most money selling used cars. In a nutshell, there is a lot more variation among used cars than among new cars, making it harder for buyers to comparison shop and easier for dealerships to hide profit. Contrary to popular belief, the profit margin on most new cars is quite small. Dealerships typically make more money selling more expensive cars, such as SUVs and luxury cars, but high-volume models are strategically priced to compete with other makes and models, as well as with rival dealerships. The Internet has helped car shoppers make sense of industry terminology like «dealer invoice,» which is what the dealership pays the manufacturer for the car. There are also laws that regulate which information must be shown to the customer — hence the ubiquitous window sticker. The math that went into new car pricing used to be pretty secretive, but now it’s all out in the open, and a well-educated shopper has a good sense of how much the dealer stands to profit from a sale and a strong position for negotiating [source: Popular Mechanics]. Used cars, however, are a different ballgame, because they’re not acquired or sold on an even playing field. Depreciation varies by year, model and region, and a dealership is under no obligation to disclose how much it paid for the car. As such, used car guides, such as Kelley Blue Book and NADA Guides, can provide guidelines for reasonable trade-in, wholesale and retail pricing, but they’re not to be taken as gospel. As long as the car looks like it’s in good condition and the price seems fair compared to similar vehicles on the market, the customer is usually none the wiser. Dealerships tend to get these used cars cheap, too, by picking them up at auction or by lowball trade-in offers to customers eager to get into new cars. Though there is more profit baked into used car pricing, dealers still make money by selling new cars. Many customers take their new cars back to dealerships for service, a loss leader while the car is under warranty but profitable in later years [source: Henry ]. The finance department is another opportunity for the dealer to score. Once the price of the car has been negotiated, the person at the finance desk starts his or her own set of sales pitches. Some dealerships urge customers to buy extended warranties or add other services to the car purchase. They’ve also been known to qualify the customer for a loan at one rate and then quote the customer a slightly higher rate, pocketing the difference [source: Weathers ]. It’s fair for a car dealership to make a profit. But some techniques, though legal, are still shady, and it’s still up to the customer to be vigilant. Is it possible to lease a used car? Can you return a used car? Do dealerships make more off new or used cars? Henry, Jim. Up Next Is it possible to lease a used car?
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Generally, dealerships make the most money selling used cars. In a nutshell, there is a lot more variation among used cars than among new cars, making it harder for buyers to comparison shop and easier for dealerships to hide profit.
Contrary to popular belief, the profit margin on most new cars is quite small. Dealerships typically make more money selling more expensive cars, such as SUVs and luxury cars, but high-volume models are strategically priced to compete with other makes and models, as well as with rival dealerships.
The Internet has helped car shoppers make sense of industry terminology like «dealer invoice,» which is what the dealership pays the manufacturer for the car. There are also laws that regulate which information must be shown to the customer — hence the ubiquitous window sticker. The math that went into new car pricing used to be pretty secretive, but now it’s all out in the open, and a well-educated shopper has a good sense of how much the dealer stands to profit dealershjp a sale kake a strong position for negotiating [source: Popular Mechanics].
Used cars, hwo, are a different ballgame, because they’re not acquired or sold on an even playing field. Depreciation varies by year, model and region, and a dealership is under no obligation to disclose how much it paid for the car.
As such, used car guides, such as Kelley Blue Book and NADA Guides, can provide guidelines for reasonable trade-in, wholesale and retail pricing, but how does a used car dealership make money not to be taken as gospel. As dealersyip as the car looks like it’s in good condition and the price seems fair compared to similar vehicles on the market, the customer is usually none the wiser.
Dealerships tend to get these used cars cheap, too, by picking them up at auction or by lowball trade-in offers to customers eager to get into new cars. Though there is more profit baked into used car pricing, dealers still make money by selling new cars. Many customers take their new cars back to dealerships for service, a loss leader while the car is under warranty but profitable in far years [source: Henry ].
The finance department is another opportunity for the dealer to score. Once the price of the car has been negotiated, the person at the finance desk starts his or her own set of sales pitches. Some dealerships urge customers to buy extended warranties or add other services to the car purchase. They’ve also been known to qualify the customer for a loan at one rate and then quote the customer a slightly higher rate, pocketing the difference [source: Weathers ]. It’s fair for a car dealership to make a profit.
But some techniques, though legal, are still shady, and it’s still up to the customer to be vigilant. Is it possible to lease a used car? Can you return a used car? Do dealerships make more off new or used cars?
Henry, Jim. Up Next Is it possible to lease a used car?
They’ll try to guilt you into paying a higher price, but don’t pay attention to the whining. I’m going to reveal how dealers really make money, and why you should never feel sorry for. First of all, most people assume that dealers pay for all their vehicles and have a bunch of money tied up in their inventory. This is false. The vast majority of dealers take out loans to build their inventory and are essentially «renting» the vehicles. If a dealer sells the vehicle in less than a month, they will make a tidy profit simply on the holdback. But we’re just getting started. But wait, there’s more! Way more Most dealers don’t make the bulk of their profits on the sale of a new car. The big profit usually comes through arranging car loans, selling add-ons, and making money on your trade-in. They simply low-ball your trade-in, then turn around and sell it for a nice profit. Of course, that large a profit is not typical, but most dealers do make the bulk of their profit in areas other than the actual sale of the vehicle. Think about that next time a dealer is whining about not making any profit. These sites show you no-haggle prices from dealers closest to you — and the deals are usually really good. This should be the first step you take when negotiating your car how does a used car dealership make money. Follow this up with my checklist to make sure you squeeze out every last bit of savings.
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