[pecord]

I use to work on a CRM specific to dealerships and I cannot say I am surprised.

There is so much data on cars and what their worth (KBB, truCar, etc) nowadays it is tough to make much of a profit on the car itself.

Most make their money in the finance or service department. It was not uncommon for a loan to be 5-6 years long or for a buy-here pay-here play to charge up to 25-30% APR

[djb_hackernews]

Indeed. Auto manufacturers don't sell vehicles, they sell debt. I've heard this is a good reason to withhold that you are paying cash at a dealer until the last moment and work the best deal you can as if you are going to use their financing. They are much more interested in making a loan than making a sale.

[js2]

I just bought two new cars, a Chevy Volt and a Mazda CX-9. The dealers couldn't care less how I was going to pay, nor whether I purchased or leased. They barely even tried to sell me extended warranties.

In fact, Mazda gave me a $500 incentive to borrow at 0% for 5 years. My GM loan was also 0% (but no incentive). So obviously they aren't making anything loaning me money.

Further, I find it hard to believe there's no or slim profits in the sales. I think I did a pretty good job negotiating. I don't even mind disclosing the numbers.

The Volt had an MSRP of $40,325. I managed a $38,258.25 sales price + $1147.75 tax + $94 tag less $1000 rebate for $38,500 out the door. The invoice on this car is supposedly $38,651.

The CX-9 was a similar situation, with an out the door price below invoice.

Both dealers I purchased from were in fact a bit out of town and had to secure the vehicles from other area dealerships. They knew I wasn't likely to use their service departments (each is almost an hour away), so I doubt they cared about any more than making the sale. The sale alone has to have been profit motivated.

Now, maybe individually they didn't make a lot of money on these sales. But it has to be the case that they are making money on their total sales volume. Maybe they'll take a loss on a sale or two if it puts them above a quota which gets them a huge bonus.

These dealers are obviously costly to operate. They have a lot of real estate and the show rooms are beautiful. They hold a ton of inventory for months at a time. I just can't believe they could exist on the slim margins they claim they make on each sale. I would be shocked if they aren't easily clearing 20% or more on average on sales alone, even on deals like mine.

[koreyb]

Franchise stores net 2-5% before taxes on "big" numbers. $20mm yearly rev for a smaller, rural, domestic franchise to multi-billions in yearly rev for a nationwide autogroup.

As mentioned, most profit is generated from service and finance.

Both of these cars you purchased are from high volume mfgs. The dealers made holdback money plus the sales count towards yearly tier incentives.

[danans]

Electric vehicles in particular pose a challenge to the service-derived revenue stream due to lower maintenance costs, so much that Audi's US President urged their dealers to focus on selling value-added services like home EV charging station installations to make up for the lower service requirements of their upcoming EVs:

https://electrek.co/2017/01/31/audi-dealerships-behind-elect...

[koreyb]

Mostly true..if you have to support a network of dealerships and can't get 30% gross on each car you sell (TSLA).

EV sales are currently less than 1% of total sales volume. But the fastest growing segment.

[r00fus]

What'd you use to buy the vehicles? Did you use an internet purchase tool or a blast fax [1]?

[1] http://credit.typepad.com/credit/2006/04/buying_a_car_wi.htm...

[js2]

I started with Edmunds and True Car. This turned out to be a waste of time as in the deals I got through those sites were just okay.

I also did some research on gm-volt.com and mazdas247.com to see what other folks claimed to be getting in terms of pricing.

Eventually I contacted a bunch of dealers that I knew had the car I wanted (Mazda and GM's web sites will show you all the inventory in an area) via email and asked them what their best price was. The dealers near me which had the cars on their lot didn't offer me the best prices though.

In the end, I got the best prices (and the most pleasant sales experience) from two dealers each about an hour from home. They were happy to negotiate via email. Even though they didn't have the specific car I wanted, both claimed they could secure it from other dealers, which they did. Both of those dealers had the most aggressive price up front and I was able to get them each to come down a bit from there.

[wahern]

As far as I understand, for every sale dealers will get a "rebate" from the car company. This obscures even more the relationship between the MSRP and the dealer's cost. I think it also works as something of a tax dodge for the dealer by shifting profits late into the fiscal year.

[toomuchtodo]

This is called a "holdback".

[sixQuarks]

not just holdback, some manufacturers offer hidden stair-step incentives that once hit, are retroactive to all vehicles sold that month. That's why you can usually get the best deal towards the end of the month, when the dealer is willing to sell below cost to get that hidden incentive, sometimes worth over $100,000 depending on volume.

[icebraining]

This American Life made a whole episode in a dealership which had that exact problem: they had to sell 129 in a month to get a bonus from the manufacturer.

"The last day of the month continues and the truism is accurate: some people get great deals because it’s the end of the month and they have to hit their goal. When you look at the numbers, the average car they sell in the last two days actually loses money."

https://www.thisamericanlife.org/radio-archives/episode/513/...

[majormajor]

I haven't experienced this, I've actually had good luck doing basically the opposite. Go in with quotes already from my bank/credit union(s), tell the dealer "if you can beat 2.2% [or whatever] I'd be interested in your financing", let them decide if that's worth it to them, but still negotiate bottom-line total dollar amount, not monthly payment, as if paying cash (since outside loan = cash, to them).

[trendia]

I can see how auto dealers sell debt (by offering loans), but how do auto manufacturers do so?

[douche]

The US big three all have financial services companies centered on auto loans.

https://en.m.wikipedia.org/wiki/Ford_Motor_Credit_Company

https://en.m.wikipedia.org/wiki/GM_Financial

https://en.m.wikipedia.org/wiki/TD_Auto_Finance

[slededit]

Its interesting to note that GM Financial is a rather new addition to GM. They sold their original vehicle financing arm (GMAC) during their bankruptcy as did Fiat Chrysler.

[90002]

They're also working in concert with Uber to offer subprime financing to drivers who don't currently own a vehicle of their own.

http://www.businessinsider.com/uber-encourages-drivers-sign-...

[maxerickson]

Now Ally:

https://en.wikipedia.org/wiki/Ally_Financial

[cmdrfred]

Often the loans are though the manufacturer.

Example: https://www.toyotafinancial.com/

[Spooky23]

They sell the cars to the dealers and lend money to them to do so.

[sixQuarks]

I disagree on the supposed "transparency" in vehicle prices these days. That's what they want you to think. KBB has a separate (supposedly more accurate) pricing service specifically for dealers. There is also a ton of shady pricing tactics going on, from manufacturers that advertise bogus entry prices (on vehicles that are not really stocked at dealerships), to dealers that price vehicles with every incentive thrown in (which nobody actually qualifies for). You still have to do a ton of research to figure out what's going on.

[RickS]

> KBB has a separate (supposedly more accurate) pricing service specifically for dealers.

This is correct, in my experience. My credit union had a set of data that was supposedly KBB but had totally different info (and lower numbers) than the consumer website. They also capped their auto loans at 120% of that value, to account for dealership markup.

[ams6110]

There's definitely a wholesale and a retail "book" for used vehicles. The dealer will buy cars at auction at wholesale (or take them in trade, proabably for less than wholesale) and try to sell them at retail.

[user5994461]

Prices are incredibly transparent and accurate.

Made money from buying and selling used cars a long time ago. The business flow died down slowly with the rise of the internet and car estimate sites.

Ultimately people could just go to whatever-site, enter their car model and get an accurate estimate, corrected for year, mileage and maintenance tasks done. There ain't any car bought or sold for 10-20% under or over median value.

[refurb]

Prices are incredibly transparent and accurate.

My understanding is that dealer incentives aren't captured in those transparent prices. And those can add up to several thousand dollars.

That's why if you go to a dealership and say "I'll pay your invoice plus $500", they'll gladly do it since they'll get $5,000 on the backend.

[user5994461]

I used to deal in < 10k€ used cars. That's where there is the most flow. Note that Europeans have much smaller and cheaper cars than Americans.

There never was room for a $5000 margin. The rare multi-k hit became rarer and rarer with the advance of the internet, until it completely disappeared.

[Shivetya]

Being in the middle of a new car purchase this week really has shed the light on how bad some loans are. Just from overhearing deals to asking the sales person if what I heard was true was enlightening.

While I did not hear anyone in that APR range one couple was working towards a 14.90 rate six year loan. Another was trying to roll over money owed on a new car but kept getting told no one would make that loan as the new exceeded the value of the new car by too much. Yet my salesperson told me they have customers they turned down and drive a new car to their dealership as if to brag they got it elsewhere.

short story, too many people are just irrational about their purchases and have very bad reasoning. thinking a thousand extra interest is okay over a long term 84 vs 60 usually by factoring the extra across the whole period instead of the extra 24 which is more telling. Let alone taking 84 month loans!

[Clubber]

I think those people think in terms of how much they can fit into their monthly income rather than how much the financing is going to cost them. In other words, if the person make $2000 a month and has $800 left over every month, a $500 car payment is ok and the 14% rate doesn't even enter into the calculation.

[Arizhel]

>Most make their money in the finance or service department. It was not uncommon for a loan to be 5-6 years long

Yeah, but with the extremely low interest rates we've been seeing the past several years, how are they making money there either?

[stevenmays]

By financing people with bad credit for extremely high rates.

[Arizhel]

Sorry, but that makes no sense. The used-car dealerships giving people crappy high-interest loans are not affiliated (nor are their lenders affiliated) with the new-car dealerships giving people 0% loans. What incentive is there to give someone a 0% loan at all? There's no profit in it. The only way it makes any sense for the lender is if 1) they hope you'll forget to make a payment and then they can charge you fees, or 2) they're affiliated with the manufacturer, and being used to promote sales.

[massysett]

Only people with good credit are getting 0 percent. A new car dealer will happily find crappy high-interest financing for poor credit buyers. The finance guy has contacts with a dozen or more lenders.

0 percent brings in good credit buyers who might otherwise buy a different car, or who might just keep driving their old cars.

[Arizhel]

>A new car dealer will happily find crappy high-interest financing for poor credit buyers.

They will, but not necessarily with the same lender. Lender A giving out 0% loans is not getting money from lender B giving out 15% loans.

>The finance guy has contacts with a dozen or more lenders.

Exactly. So what's the incentive for bank A to lend at 0%? They're not going to see any of the profit that other lenders get. In fact, they're not going to get any profit at all, unless the buyer defaults early or misses payments. It seems to me that the whole 0% loan thing is a way for dealers and mfgrs to keep their inventory moving, and perhaps make money just on the regular mark-up of the car itself (which isn't much with new cars these days), and hope the buyer comes back for overpriced service.

[Zachery]

They've increased the cost of the cars to offset the 0% rate.

You should get a bigger cash discount to buy the car outright, instead of financing through them.

[Spooky23]

0% is a teaser rate from the manufacturer's captive financing arm. They only subsidize the premium, low risk buyers.

[gscott]

My wife bought a car from Carmax she has good credit they offered her a loan at 10%. She want through Farmers Insurance for a car loan at about 5%. At least in the case of Carmax they are doing high rate loans hoping people don't shop around for the loan.

[datasage]

Its not so much about making money on the person getting 0%, since buying a brand new car isn't that high margin for the dealership.

Instead, that buyers is more likely to be trading that car in 2-3 years at which point the dealer can make more off the car again.

[Spooky23]

It's not a zero percent loan. The interest is subsidized by the manufacturer. The dealer gets a commission for originating the loan.

If you have shitty credit, that 0% loan pops up to 8-11%.

[vkou]

Interest rates on houses are low, but interest rates on vehicles are... Not so low.

Besides, it doesn't matter what the prime interest rate is - the consumer rate is always (prime + markup)%.

[kbutler]

Eh. Subprime rates, maybe. But I've got two car loans, one under 2%, one under 1%. I feel like I should pay them off early on principle (as opposed to principal), but it would be foolish to divert investment funds to paying them off early.

[trendia]

Assuming you can stomach the risk, if you can get a car loan for 1% and a market return of >1%, then you would be better off taking the loan, investing your money, and paying off the loan later.

[vkou]

With a good enough credit rating, and in tough enough times, you can get 0% loans, no payments for 12 months. Sometimes, the need to dump inventory outweighs the need to make money on loans.

(Of course, if you miss a payment, that 0% rate will jump to 12%.)

[birdmanjeremy]

Really? Both our cars are financed at < 2%. Cheap auto loans are all over the place.

[drspacemonkey]

I was under the impression that those were introductory teaser rates that balloon up later, just like what happened with subprime mortgages.