In the United States and Canada, a franchised new-car and -truck dealership is a retailer that sells new and/or used cars, including certified preowned vehicles, employs trained automotive technicians, and offers financing.
Used car dealerships carry cars from many different manufacturers, while new car dealerships are generally franchises associated with only one or two manufacturers. In some locales, dealerships have been consolidated and a single owner may control a chain of dealerships representing several different manufacturers.
New car dealerships also sell used cars, and take in trade-ins and/or purchase used vehicles at auction. Most dealerships also provide a series of additional services for car buyers and owners, which are sometimes more profitable than the core business of selling cars.
Selling cars
Most car dealerships display their inventory in a showroom and on a car lot. Under U.S. federal law, all new cars must carry a sticker showing the offering price and summarizing the vehicle's features. Typically, salespersons working on commission only, negotiate with buyers to determine a final sales price. In many cases, this includes negotiating the price of a trade-in — the dealer's purchase of the buyer's current automobile. Negotiations from the dealership's perspective is often referred to as "desking" a deal, although different terms are used.
Profit margins on automobile sales are low. A new car dealer may mark up a car by less than two percent over the manufacturer's invoice cost, and typically the car dealer borrows from the manufacturer for inventory and pays interest (called flooring or floorplanning). On the other hand, some manufacturers pay "hold-back" to improve the fiscal stability of dealers. Typically this is around 1% to 2% of the vehicles' wholesale price to the dealer. Hold-back is usually not a negotiable part of the price a consumer would pay for the vehicle. Hold back is designed to offset the cost the new car dealer has for paying interest on the money being borrowing to keep the car in inventory.
Trading for cars
Many times a customer will offer his or her car as a trade-in in hopes of offsetting the final price paid for a new(er) car which the buyer is interested in acquiring. If this buyer has full ownership of (owing no payments on it), the car will not only offset the selling price but also lower the sales tax paid on the new(er) car in most states.
To an average dealer, the actual cash value of a trade is an opinion of what the vehicle could reasonably be sold for at auction in six weeks to three months time, less any reconditioning costs should the dealer be unable or unwilling to re-sell the trade to the public. Since most states have requirements for a dealer to warranty or even guaranty a used vehicle for a certain amount of time and or mileage if sold to the public at a certain price, a dealer must make a profit selling the previously traded car (now a used car).
Trade in value is an important facet of the car deal. Trade value estimates can be found at sites such as NADA,KBB, Edmunds, and Consumer Reports. However, most of these values are estimated from a theoretical chart that may or may not be based on recent average sales prices of a particular make and model. If a particular make and model has less accurate data available from recent auction prices the dealer will be more cautious in the appraisal of the car. Inputting an identical used car on each of the above sites will render different values. Sometimes these values will differ slightly,while at other times their sites may differ significantly.
A dealer may have a manager who appraises each vehicle offered for trade. This person will often be the person who also attends used car auctions, often buying and selling on behalf of the dealer. This person will have a realistic idea of the actual cash value of the trade. A dealer will look at a trade for body damage, windshield damage, engine noise, and known problems with a particular model, and price it to re-sell it at a profit.
The better way to get a real idea of what a trade car's value is to go to at least three dealers and ask them what they would pay for a trade outright. One or more dealers that handles that particular make and model when sold new should be consulted.
Additional services
Most car dealers offer a variety of financing options for the purchase of cars, including loans and leases. Financing can be highly profitable for dealerships. There have been some scandals involving discriminatory or predatory lending practices, and as a result, vehicle financing is heavily regulated in many states. For example, in the U.S. state of California, there must be several signs prominently posted on the premises, and the contract must contain several prominent warnings, such as the words "THERE IS NO COOLING-OFF PERIOD."
Although the terms of installment contracts are negotiated by the dealer with the buyer, few dealers actually make loans directly to consumers. In the business such dealers are called "buy here, pay here" dealerships. These stores are able to make loans directly to customers because they have some means of recovering the vehicle if the customer defaults on the loan. The means by which "buy here, pay here" dealers can recover a vehicle vary by state.
Most dealers utilize indirect lenders. This means that the contracts are immediately "assigned" or "resold" to third-party finance companies, often an offshoot of the car's manufacturer such as GMAC, or banks, which pay the dealer and then recover the balance by collecting the monthly installment payments promised by the buyer. Sometimes the dealer has the option of marking up the interest rate of the contract and retaining a portion of that markup. For example, a bank may give a wholesale money rate of 6.75% and the dealer may give the consumer an interest rate of 7.75%. The bank would then pay the dealer the difference or a portion thereof. This is a regular practice because the dealership is selling the contract to a bank just like it sold a car to the customer. Most banks or states strictly limit the amount a contract rate may be marked up (by giving a range of rates at which they will buy the contract). In many cases this amounts to little difference in the customer's payment as the amount borrowed is small by comparison to a mortgage and the term shorter.
Customers may also find that a dealer can get them better rates than they can with their local bank or credit union. However, manufacturers often offer a low interest rate OR a cash rebate, if the vehicle is not financed through the dealer. Depending upon the amount of the rebate, it is prudent for the consumer to check if applying a larger rebate results in a lower payment due to the fact that s/he is financing less of the purchase. For example, if a dealer has an interest rate offer of 7.9% financing OR a $2000.00 rebate and a consumer's lending source offers 8.25%, a consumer should compare at the credit union what payments and total interest paid would be, if the consumer financed $2000.00 less at the credit union. The dealer can have their lending institution check a consumer's credit. A consumer can also allow his or her lending source to do the same and compare the results. Most financing available at new car dealerships is offered by the financing arm of the vehicle manufacturer or a local bank.
Dealers may also offer other services, typically through the Finance and Insurance office. These additional services can include:
- Service contracts: While any vehicle sold in the United States now comes standard with some degree of manufacturer's warranty coverage, customers have a wide range of choices to cover their vehicle from mechanical failure beyond that point. Service contracts may have the same terms of coverage as the vehicle's original manufacturer's warranty, but often they do not. Often service contracts carry a deductible as might any insurance contract. Because of the vast number of choices, it is important for consumers to be aware of the coverages before entering into an agreement. Usually these service contracts do NOT cover regular maintenance items such as brakes, fluids, or filters. In some states, such as Florida, the cost of such agreements are heavily regulated.
There are three main types of service contracts offered. The first is offered by the manufacturer through the dealership and is usually good at any dealership in the US that has that same franchise. When warranty repair work is required, the dealer submits a claim to the manufacturer and is reimbursed for the repair less the deductible paid by the consumer. Under this type of service agreement there is usually no incentive for the dealer to do anything but repair the car as reimbursement from the manufacturer is usually profitable.
The second service contract is usually a simple insurance policy that the dealer purchases wholesale and is administered through a third party working for the dealer. This "third party" can often be a major insurance company. This money collected by the dealer from the consumer is put in a "reserve" fund for the length and / or term of the service contract. When a repair is required the dealer authorizes the repair with the third party administrator, usually before the repair is done. The third party deducts the repai
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