How Car Dealers Make Money off You

Car Dealers

At some period of our lives, we face the necessity of buying a vehicle. No matter, whether we opt for a brand new car or a second-hand, we usually have to go through a dealership. This article is written to help consumers avoid being ripped off by dealers’ tricks used to maximize dealership’s profit.

Mark Up as a way to make huge profits

This is the most evident of ways an auto dealer makes money off customers. The difference between manufacturer`s suggested retail price and dealer cost may be 5-10%. At the first sight it may seem insignificant, but when you are dealing with large sums then the profit margin is quite impressive. For instance, a vehicle that a dealer pays $ 40,000 can bring the profit of about four-thousand dollars. Let us assume that the dealership sells two or three hundred of cars per month; it means that markup alone can bring it nearly a million dollars.

Exploring the nature of “anchoring”

Let us confess the words discount and sale have a magnetic impact on us. When dealer advertises $6,500 discounts for customers who show up for a “sale” we are enticed to run to the dealership immediately. As the matter of fact, this enticing discount has nothing to do with reality, as the dealer first rise the price and the offer huge discount on it. This is a general truth, however, this old saw still works. The phenomenon we fall for from time to time is known as “anchoring”.

To understand the nature of “anchoring” we should ask behaviorists. They use this word to denote the basic tendency of people to add out-weighted significance to the first piece of information. This can happen in a different situation, but let us stick with money. For instance, if a car dealer says that the vehicle costs $25,000 and the offers you to buy it for only $20,000 you will be sure that you are offered a better deal that if he initially has offered you to buy it for $20,000. The first number, $25,000, is an anchor, and any following offer is an adjustment of initial price. Customers see the $20,000 offer as a $5,000 discount. However, if you are familiar with this phenomenon, you are immune from this fraudulent tactic.

Underestimating a trade-in

When a customer trades in his vehicle, the dealer will surely try to underestimate the trade to make double profit. He will get immediate profit from actual cash value, i.e. if a car actually worth $10,500 (ACV), but the dealer offers only $9,000, he will get an immediate thousand and half dollar profit. The dealer will scoop profit also when he sells your trade-in vehicle. For instance, if he buys your car for $9,000, has it fixed, makes sure it`s safe to drive and sells it for $12,000.

We’ll continue to describe the most common dealer tricks used to make money off unsuspecting customers in our next article.