There are basically two areas a dealer can make money selling a car. In the industry they’re called “front end” and “backend.”
Front end – this is the difference from the actual cost of the vehicle to the agreed sales price of the vehicle being purchased.
$20,000.00 = Dealer net cost.
$22,500.00 = Agreed upon sales price.
$2,500.00 = Total amount of money made on the front end.
Backend – The amount of money made between product cost and agreed upon sales price from the finance department including, but not limited to, finance, warranties, maintenance programs, insurance products, etc.
Car dealers do a great job negotiating the price of the vehicle, but they do their best job when they get you into the finance office. After you’ve agreed to the price of the car, you’ll be turned over to the finance department. This is where you will be offered several finance options, warranties, additional insurance products and eventually sign all of your paperwork for your car. The finance department is a very high profit center for a dealership and it is not the time to let your guard down.
The individuals in these departments are highly trained professional salespeople. Their job is to up sell you high profit backend products such as extended warranties, pre-paid maintenance programs, GAP, and other insurance products.
Another highly overlooked way dealers make money in finance is by increasing the interest rate lenders charge the customer and then pocketing the difference. This is called “finance reserve“ and most dealers will attempt charge up to 2.5% in additional interest, although there are times they will raise the rate by as much as 7% or more.
