Why It's Important for Dealers to Sell Cars Quickly
There is usually several million dollars worth of inventory on a typical dealer's lot, and those cars are all owned by a bank or finance company.
The dealer borrows money through what's called "floor plan financing" in order to keep the inventory on their lots.
Floor plan financing is a type of short-term loan that is paid off in 30 to 90 days, the time it normally takes to sell a car.
A typical new car costs a dealer about $5 to $10 in interest per day. So if a car sits on the lot for 30 days, the dealer will be charged $150 - $300 in interest payments.
This is why dealers want to sell cars as quickly as possible - to reduce their financing costs and increase profits.
Most manufacturers reimburse these finance costs through what is called "dealer holdback". This is usually 2 - 3% of the invoice price of the vehicle.
On a typical $28,000 car, a 2% holdback would amount to around $550. If the dealer sells this car in 30 days and incurs financing costs of $300, then they will make a profit of $250 on the holdback.
If a car has been sitting on the lot for a long time, the financing costs will eat up all the potential profit and the dealer may have to sell the car at a loss.
You can usually get the best deals on cars that have been sitting on the lot a long time since dealers are anxious to get rid of them and cut their losses.
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- Gregg Fidan
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About: Gregg Fidan
Gregg Fidan + is the founder of RealCarTips. After being ripped off on his first car purchase, he devoted several years to figuring out the best ways to avoid scams and negotiate the best car deals. He has written hundreds of articles on the subject of car buying and taught thousands of car shoppers how to get the best deals.