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Have you ever wondered if the sales people told you EVERYTHING when they said that the dealer was "only making $200" or "only making $300" on the car at the price they were trying to sell you the car at?
Have you ever been told by the salesperson that the dealer gets back *** 3% OF THE TOTAL LIST PRICE OF THE CAR *** from the manufacturer at the end of year (some cases, end of quarter)?
Here's how it works:
Let's consider a compact car that the dealer pays $11,213 for and which has an MSRP price of $13,175 (not including destination charge). At the end of business year (or business quarter), the manufacturer REFUNDS directly to the dealer *** 3% *** of the MSRP price, and NOT base cost price for each car sold by the dealer during the previous year (or quarter). In this case, that's $395!
( $13175 x .03 = $395.25)
This $395 is OVER AND ABOVE ANY OTHER "PROFIT" that the dealer may make on the car sale. For this example, the ACTUAL DEALER COST.
(ADC) is figured as follows:
(1) Amount dealer initially pays for car = $11,213
(2) 3% Holdback Amount (.03 x MSRP) = -$ 395
--------
(1) - (2) = $10,818
(3) Destination Charge (DC) = +$ 430
--------
Actual Dealer Cost (ADC) = $11,248
Comparing Total List Price -vs- ADC price:
MSRP = $13,175 Dealer Cost = $11,248
DC = $ 430
-------- --------
Total List = $13,605 ADC = $11,248
Difference = Total List - ADC
= $13,605 - $11,248
= $ 2,357
Therefore, the dealer ACTUALLY pays 17.3% LESS THEN Total List
Price for this car ((2357 / 13605) x 100 = 17.3).
Finally, if you were to bargain with the dealer for the car mentioned above, you should be able to obtain it for around $11,500 to $11,600 plus tax. This allows the dealer a FAIR PROFIT of between $250 and $350 on the deal.
In actuality, it is not quite that simple. Remember the dealer buys his cars using "borrowed" money and that the dealer must pay a finance charge for the use of that money. However, the finance charge only applies for the period that the dealer has the use of that borrowed money and is eliminated when the dealer sells the car and receives payment from YOU the customer.
This means that the 3% REBATE is actually somewhat less then 3% and usually comes out to be around 2.7% instead. Therefore, based on all that, the EFFECTIVE REBATE (the actual additional profit direct to the dealer) is about $355 and not $395. On that basis, you should have to pay no more then $11,550 to $11,650 for the $13,605 MSRP car giving the dealer a FAIR PROFIT of $250 to $350.
For cars costing the dealer less then $11,248, the amount is proportionally smaller. For cars costing the dealer more than $11,248, the amount is proportionally larger.
KEEP THIS IN MIND WHEN BARGINNING FOR YOUR NEXT NEW CAR. THE NEXT TIME THAT THE DEALER TRIES TO TELL YOU THAT HE IS ONLY MAKING "$200" OR "$300" ON THE DEAL, REMIND HIM OF THE 3% HOLDBACK!
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