In the United States, a car dealership is a business that sells cars. A car dealership can either be a franchised dealership selling new and used cars, or a used car dealership, selling only used cars. In most cases, dealerships provide car maintenance and repair services as well as trade-in, leasing, and financing options for customers.
Used car dealers can carry cars from various different manufacturers, while nearly all new car dealerships are franchises associated with one or more manufacturers. Some new car dealerships may carry multiple brands from the same manufacturer. In some locales, dealerships have been consolidated and a corporation may control a chain of dealerships representing several different manufacturers.
In the United States, direct manufacturer auto sales are prohibited in almost every state by franchise laws requiring that new cars be sold only by dealers.[1] Economists have characterized these regulations as a form of rent-seeking that extracts rents from manufacturers of cars, increases costs for consumers, and limits entry of new car dealerships while raising profits for incumbent car dealers.[2] Research shows that as a result of these laws, retail prices for cars are higher than they otherwise would be. [3]
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.[4] Salespersons, predominantly those who only work on commission, 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. Negotiation from the dealership's perspective is the course of dealing that occurs beginning when a salesperson negotiates a deal to the point where the customer makes an offer on the new vehicle, often including the customer's current vehicle as part of the deal.
The salesperson then brings the offer, plus a sign of good faith from the customer, which can be a check with a deposit or a credit card, to the sales manager. This is also known as the booking amount, which is usually refundable. The sales manager returns options for the monthly payment, financing, and pricing options available to the customer in a process referred to as "desking" the deal. If the customer and sales manager agree on the terms, they sign off on the option chosen. The next step is a purchase and sales agreement or a sales agreement, and the actual monetary down payment is generated. The manager and customer sign this paperwork, and then the customer is handed off to the "box," or the finance and insurance office where various add-ons are often sold that include special waxing, wheel protection, or often, extended warranty services. The final paperwork is also printed out at this phase. A percentage of people believe that desking is part of the negotiation process, it only occurs once the salesperson has a legitimate offer on the vehicle from the customer and can hand the sales manager a token of good faith, as noted.
A car dealer orders vehicles from the manufacturer for inventory and pays interest (called flooring or floor planning). Dealer holdbacks are a system of payments made by manufacturers to their dealers.[5] The holdback payments assist the dealer's ability to stock their inventory of vehicles and improve the profitability of dealers. Typically the holdback amount is around 1% to 3% of the vehicles' manufacturer's suggested retail price (MSRP).[6] Hold-back is usually not a negotiable part of the price a consumer would pay for the vehicle, but dealers will give up the dealer holdback to get rid of a car that has been sitting in its inventory for a long time, or if the additional sale will bring them up to the manufacturer's additional incentive payments for reaching unit bonus targets.[7] The holdback was originally designed to help offset the cost the new car dealer has for paying interest on the money that is borrowed to keep the car in inventory but is in effect lowering the dealer's gross profit, and thus the sales commissions paid to employees.[8] The holdback allows dealerships to promote at- or near-invoice price sales and still achieve comfortable profits on such transactions.
With the advent of the Internet, the process of selling cars has undergone a considerable change. More than 70% of car purchases in the United States start with research on the Internet. It empowers buyers with knowledge of the features of comparable cars and the prices and discounts offered by different dealers within the same geographic area. This helps the buyers during price negotiations and puts further pressure on the profit margin of the dealer.[9]
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, 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 guarantee a used vehicle for a certain amount of time and or mileage if sold to the public at a certain price,[10] 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. Many websites offer trade-in value estimates.[11] 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.
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.
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 California, there must be several signs prominently posted on the premises,[12] and the contract must contain several prominent warnings, such as the words "THERE IS NO COOLING-OFF PERIOD".[13]
Although the terms of installment contracts are negotiated by the dealer with the buyer, few dealers make loans directly to consumers. In the business, such dealers are called "Buy Here Pay Here" dealerships. These stores can 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 installment loan contracts are immediately "assigned" or "resold" to third-party finance companies, often an offshoot of the car's manufacturer such as GM Financial, Ally Financial, or banks, which pay the dealer and then recover the balance by collecting the monthly installment payments promised by the buyer. To facilitate such assignments, dealers generally use one of several standard form contracts pre-approved by lenders. The most popular family of contracts for the retail installment sale of vehicles in the U.S. are sold by business process vendor Reynolds and Reynolds; their contracts have been the subject of extensive (and frequently hostile) judicial interpretation in lawsuits between dealers and customers.
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.[14] 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. These additional services can include:
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 repair expense from the dealer's reserve fund. The fewer payments or deductions made on the service contract the greater the profit to the dealer as any unused portion of the "reserve" is given back to the original selling dealer less an administration fee when the service contract retires.
The third type of service contract can be purchased directly from a few automobile insurance companies.
The dealers are not held to the lending standards that most banks are, and also at times of bankruptcy are completely exempt in times of default leading the car dealership with the opportunity to repossess at any time regardless of breach of contract. Some other pro-advocates say the monthly obligation on leases is cheaper because there are no sales taxes on the vehicle as opposed to the amount a buyer may pay if they are making loan payments on a new or used car purchase.
Car dealers also provide maintenance and in some cases, repair services for cars. New car dealerships are more likely to provide these services since they usually stock and sell parts and process warranty claims for the manufacturers they represent. Maintenance is typically a high-margin service and represents a significant profit center for automotive dealers.
In the United States, most aspects of operating a car dealership are regulated at the state level. Car titles are issued and transferred by the individual states through their respective Departments of Motor Vehicles. The purchase price of a vehicle usually includes various fees which the dealer forwards to the state DMV to transfer the vehicle's title to the buyer. In many states, the DMVs also license and regulate car dealerships. In many states, car dealerships are capable of submitting all necessary forms to the DMV on behalf of the customer and are authorized to issue temporary paperwork to the customer to prove that the transaction is in process, allowing the customer to avoid a trip to the nearest DMV office.
Consumer complaints against car dealerships are usually investigated by the Attorney General's office in the state where the dealership is located. In states where the DMV licenses and regulates car dealerships, the DMV may have responsibility for initially handling consumer complaints and the state AG's office becomes involved only when there is evidence that a dealer may have committed a crime.
According to one survey, more than half of dealership customers would prefer to buy directly from the manufacturer, without any monetary incentives to do so. An analyst report of a direct sales model is estimated to cut the cost of a vehicle by 8.6%.[16] This implies an even greater demand currently exists for a direct manufacturer sales model. However, laws in many U.S. states prohibit manufacturers from selling directly, requiring customers to buy new cars through a dealer.[17]
Studies have found that some auto dealerships charge higher interest rates or otherwise raise their prices to females and ethnic minorities, including Asians, and African Americans.[18] [19] These issues have sometimes resulted in lawsuits, including class action lawsuits, against the dealers on the basis of discrimination based on nationality.[20]
2020 stats[21]
2020 stats[22]