Introduction
Financing is the process of borrowing money to purchase something. It can be used to purchase cars, homes, furniture, and other large items. Car dealerships offer financing options to their customers in order to make purchasing a vehicle easier. But how do car dealerships make money on financing? In this article, we will explore the various ways car dealerships make money on financing.
Selling Financing Products
Car dealerships offer a variety of financing products, such as loans, leases, and credit cards. These products are designed to make it easier for customers to purchase a car. Most dealerships also offer extended warranties and gap insurance to protect the customer from unexpected expenses. By selling these products, dealerships can generate additional revenue.
Interest Rates
Interest is the cost of borrowing money. When a customer takes out a loan to purchase a vehicle, the dealership charges an interest rate. This rate is typically higher than the rate offered by a bank or other lender. The difference between the two rates is known as the “spread,” and it is how dealerships make money on financing.
According to a study by the Consumer Financial Protection Bureau (CFPB), the average interest rate charged by dealerships is 6%. This rate is significantly higher than the national average of 4.5%. The spread between the two rates allows dealerships to generate additional revenue from the sale of financing products.
Fees and Penalties
In addition to interest rates, dealerships also charge fees and penalties when financing a vehicle. Common types of fees include origination fees, late fees, and prepayment penalties. These fees are designed to increase the cost of the loan and generate additional revenue for the dealership.
The CFPB study found that the average fee charged by dealerships is $800. This is significantly higher than the average fee charged by banks and other lenders, which is typically around $100. The higher fees allow dealerships to generate additional revenue from the sale of financing products.
Promotional Offers
Dealerships often offer promotional offers to entice customers to finance a vehicle. One of the most common offers is zero percent financing. This offer allows customers to finance a vehicle without paying any interest. While this may sound like a great deal, it usually comes with restrictions, such as shorter loan terms or higher fees.
Dealerships also offer other promotional offers, such as cash back or discounts. These offers allow customers to save money on the purchase of a vehicle and generate additional revenue for the dealership.
Rebates
Rebates are another way dealerships make money on financing. A rebate is a discount offered by the manufacturer to encourage customers to buy their product. For example, a manufacturer may offer a $1,000 rebate on a certain model of car. Customers who take advantage of this offer will save money on the purchase of the car, and the dealership will receive the rebate from the manufacturer.
Trade-Ins
When a customer trades in an old vehicle for a new one, the dealership can resell the used vehicle and generate additional revenue. This is beneficial for both the customer and the dealership, as the customer gets a discount on the purchase of the new vehicle and the dealership makes money from the resale of the used vehicle.
Service and Parts Sales
Dealerships also make money from the sale of service and parts. Customers who purchase a vehicle through financing will often need to have regular maintenance and repairs done. The dealership can charge for these services and generate additional revenue. They can also make money from the sale of parts and accessories.
Conclusion
Car dealerships make money on financing by offering a variety of financing products, charging interest on loans, imposing fees and penalties, providing promotional offers, offering rebates, accepting trade-ins, and selling service and parts. By understanding how dealerships make money on financing, customers can make informed decisions when purchasing a vehicle.
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