What is a Dealer's "Back End" Profit?
What's surprising to many is that car dealers don't actually make much profit on the sale of a new car.
In fact, many dealerships lose money on new car sales after factoring in fixed expenses such as rent, advertising, and labor costs.
If dealers only sold new cars, most would be out of business.
So how do dealers manage to not only survive, but prosper? The answer is due to "back end profits".
There are two sources of profit for dealers: The "front-end" which is made on the sale of the vehicle, and the "back-end", which includes everything sold after the sale.
For example, if you buy a car for $20,000 and the dealer's cost was $19,000, then they made $1,000 in front-end profit.
But that's just the start. After the sale of a vehicle, customers are whisked away into the Business Manager's office (also known as the Finance Manager).
This is where the dealer arranges financing for those who need a car loan and presents a large list of additional services.
As a smart car buyer, you should always arrange your own financing before visiting a dealer. But most people don't, and this is where a dealer will really pad their profits, by adding their own finance charge on top of the car loan they arrange.
Dealers can make an additional $1,000 to $2,000 in profit just on the financing alone.
In addition, they will try to sell you extended warranties, maintenance contracts, and other add-ons such as paint and fabric protection, all of which can easily add another $1,000 profit to the deal.
All in all, the back end profit could exceed front-end profit by 300% or more. This is why it's important to not only focus on the selling price of the car, but to look at the overall deal.
It's easy to get a good price, it's much harder to get a good deal!
My Recommendation for Car ShoppersTrueCar No-Haggle, Edmunds Price Promise and 1-800 Car Show are the quickest way to see the lowest car prices in your area. These sites show you no-haggle prices from dealers closest to you - and the deals are usually really good. This should be the first step you take when negotiating your car price. Follow this up with my checklist to make sure you squeeze out every last bit of savings.
- 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.