How Car Dealerships Make Money on Financing: An In-Depth Look

Introduction

Car dealership financing is a type of loan that allows consumers to purchase a car from a dealership with a down payment and monthly payments over a set period of time. While many people assume that car dealerships just make money by selling cars, they can actually make a substantial amount of money from financing options as well. This article will explore the ways in which car dealerships make money on financing so that buyers can be more informed when negotiating their loans.

Offering Extended Warranties

One of the most common ways car dealerships make money on financing is by offering extended warranties. An extended warranty is an additional service contract that covers repairs and maintenance after the manufacturer’s warranty has expired. These warranties can vary in length and coverage, but they typically cost between $500 and $2,000.

From the dealer’s perspective, extended warranties can be very profitable. According to a study conducted by the National Automobile Dealers Association, dealerships make an average of $900 in profit per extended warranty sold. Furthermore, these warranties can help boost customer loyalty and increase the likelihood of repeat business.

For buyers, however, extended warranties can be a costly add-on that may not be worth the price. It’s important to read the fine print to make sure that you’re getting the coverage you need at a price that won’t break the bank. Additionally, it’s important to note that many manufacturers offer their own extended warranties, which may be more cost-effective than purchasing one from a dealership.

Selling Gap Insurance

Another way car dealerships make money on financing is by selling gap insurance. Gap insurance is a type of coverage that pays the difference between what an insurance company will pay out in the event of a total loss and the remaining balance of a loan. For example, if a car is totaled and the insurance company pays out $20,000, but the buyer owes $25,000 on the loan, gap insurance would cover the remaining $5,000.

From the dealer’s perspective, gap insurance can be quite lucrative. On average, dealerships make $500 in profit per policy sold. Additionally, gap insurance can help protect buyers from financial hardship in the event of a total loss.

However, there are some potential drawbacks to buying gap insurance from a dealership. For starters, gap insurance policies sold by dealerships tend to be more expensive than those offered by third-party insurers. Furthermore, many lenders offer gap insurance as part of their loan package, so it’s important to check before spending extra money on a separate policy.

Charging Interest on Loans

Another way car dealerships make money on financing is by charging interest on loans. Interest is the fee charged by a lender for borrowing money, and it’s usually expressed as an annual percentage rate (APR). The higher the APR, the more money the dealership will make from interest charges.

From the dealer’s perspective, charging interest on loans can be highly profitable. In fact, the National Automobile Dealers Association reports that dealerships make an average of $1,200 in profit from interest charges on each loan. Additionally, charging interest can help offset the cost of providing loans to buyers with less-than-perfect credit.

For buyers, however, high interest rates can lead to significant additional costs. Therefore, it’s important to shop around for the best possible rate before agreeing to a loan. Additionally, it’s wise to consider other financing options, such as personal loans or credit cards, which may offer lower interest rates.

Selling Add-Ons and Upgrades

Car dealerships also make money on financing by selling add-ons and upgrades. Add-ons are additional features or services that can be added to a car, such as rustproofing, window tinting, or interior protection. Upgrades are modifications that can improve performance or aesthetics, such as custom wheels or a stereo system.

From the dealer’s perspective, add-ons and upgrades can be extremely profitable. According to a report by the Automotive News Data Center, dealerships make an average of $60 in profit per add-on and upgrade sold. Additionally, these items can help boost customer satisfaction and increase the value of the car.

For buyers, however, add-ons and upgrades can be costly and may not be worth the price. Furthermore, it’s important to remember that these items are not covered by the manufacturer’s warranty and may need to be replaced or repaired at the buyer’s expense.

Offering Credit Life Insurance

Another way car dealerships make money on financing is by offering credit life insurance. Credit life insurance is a type of coverage that pays off a loan if the borrower dies before the loan is paid off. This type of insurance is often offered as an optional add-on to car loans.

From the dealer’s perspective, credit life insurance can be quite profitable. On average, dealerships make $100 in profit per policy sold. Additionally, offering credit life insurance can help boost customer confidence and encourage buyers to take out larger loans.

For buyers, however, credit life insurance is often unnecessary and can be quite expensive. Furthermore, it’s important to remember that most life insurance policies already provide coverage in the event of death, so it may not be necessary to purchase additional coverage.

Providing Vehicle Service Contracts

Car dealerships also make money on financing by providing vehicle service contracts. A vehicle service contract is an agreement between the dealership and the buyer that provides coverage for certain types of repairs and maintenance. These contracts typically cover items such as tires, brakes, and engine components.

From the dealer’s perspective, vehicle service contracts can be quite profitable. On average, dealerships make $800 in profit per contract sold. Additionally, these contracts can help boost customer satisfaction and encourage buyers to return to the dealership for service.

For buyers, however, vehicle service contracts can be costly and may not be worth the price. Furthermore, it’s important to read the fine print to make sure that you’re getting the coverage you need at a price that won’t break the bank.

Generating Lease-End Fees

Finally, car dealerships make money on financing by generating lease-end fees. Lease-end fees are charges that are assessed when a lease is terminated early. These fees are typically based on the amount of time left on the lease and can range from $50 to $300.

From the dealer’s perspective, lease-end fees can be quite profitable. On average, dealerships make $200 in profit per fee collected. Additionally, these fees can help offset the cost of providing leases to buyers.

For buyers, however, lease-end fees can be costly and may not be worth the price. Therefore, it’s important to read the fine print of your lease agreement to make sure you understand the terms and conditions before signing.

Conclusion

In conclusion, this article has explored the various ways car dealerships make money on financing. From offering extended warranties and gap insurance to charging interest and selling add-ons, car dealerships have plenty of opportunities to turn a profit. As a buyer, it’s important to be aware of these practices and to negotiate for the best deal possible.

To get the most out of your car buying experience, it’s important to do your research and ask questions. Be sure to compare prices and read the fine print before agreeing to any financing options. Additionally, it’s wise to consider other financing options, such as personal loans or credit cards, which may offer better terms and lower interest rates.