The auto industry is a huge business and new car dealers have been benefiting from high transaction prices with record profits. According to data from J.D. Power, the average profit that a dealer makes on a car is set to reach $5,013 in the first quarter of 2022, a whopping surge of 126% compared to the previous year.
Does that mean every car dealer is making over $5,000 on a new car? Not quite. The figure is an average of gross profit including finance & insurance. There are two main types of profit on a car: front-end and back-end. The first involves the selling price while the second involves products sold after the car's price is decided.
For example, a dealer could make $500 on the price of a car but $3,000 in "back-end" financing products like GAP insurance, prepaid maintenance, and/or financing. Dealers have the ability to mark-up interest rates, though this practice can have manufacturer and regulatory limitations depending on where you live.
Some automakers have been taking a stricter stance on rate mark-ups. Earlier this year, VW and Audi told dealers they would limit the markup on lease contracts to 1% (compared to 3% previously). Changes like this could make it easier for consumers to get a better deal, though specific rules can vary based on brand.
While there can be ways to avoid a dealer markup, it may be difficult to escape markups in 2022. Not every car also offers dealers the same profit margin. For example, the invoice price for the new Hyundai IONIQ 5 is identical to its MSRP. Entry-level models also typically have smaller profit margins than other styles.
Other factors can affect how much a dealer makes on a car. Some brands may offer programs based on sales volume, incentivizing dealers to sell more cars rather than necessarily focusing on the amount made per vehicle. In some cases, market adjustments can add to their bottom lines amid an inventory shortage.
If you're looking to get the best deal on a car, consider starting with negotiating a realistic price based on supply & demand. Just be sure you don't overlook other aspects of the purchase in case there's room for negotiation. Doing so could help ensure you don't overpay and get a fair price on the car or truck you want.
