Have you ever wondered how car dealerships actually make money? You’re not alone. Many car buyers worry they’ll get taken advantage of. No one wants to be the customer who unknowingly hands a dealer thousands in profit.

👉 The truth is, dealerships make money in three main ways: vehicle sales, service and parts, and the Finance & Insurance (F&I) department.

Whether you’re shopping for a car, curious about the business side of dealerships, or just stumbled across this post, you’re in the right place. After spending 43 years in the car business, I’ve seen it all—and I’m here to break down exactly how dealers turn a profit.

Let’s take a closer look at where the money really comes from.

Car dealers don’t make money from selling cars

It seems counter-intuitive to suggest that car dealerships don’t make money selling cars. Why be in the car business if you don’t make money from selling cars?

This is a valid question, and unless you really understand how car dealerships operate, its answer is shrouded in secrecy. The reality is, most car dealerships don’t make much profit from selling cars. Some do (and we’ll discuss how), but for most, car sales don’t make up the majority of profit generated at a dealership. Let’s explore why.

Regardless of selling a new car or a used car, there are two separate parts of a car deal where the dealer can make money. They are referred to as the “front-end” and the “back-end” of the deal.

The front-end of the deal is everything that happens when you are working with the salesperson. The back-end of the deal is everything that happens after the salesperson is out of the picture, and the Finance Manager steps into the picture.

In theory, you can have a used car sale with no frontend profit and a lot of backend profit. Or you could have a new car deal with a lot of frontend profit and no backend profit. Or, vice versa.

If you hear a dealer say, “we are taking a huge loss on the front-end, you better make up for it on the back-end of the deal,” you know that means they aren’t making much (or any) money on the sale of the car. Their goal is now to make money in the F&I part of the sale.

First, we’re going to focus on front-end profit. Back-end profit is covered below in the F&I section. As you’re about to learn, selling cars is simply a means to sell other things.

Front-end profits

The manufacturer’s suggested retail price (MSRP) of a car, as well as any applicable charges and fees (i.e. destination charges) are listed on every new vehicle’s Monroney sticker. The Monroney sticker provides you with a line-by-line overview of what is included on every new car sold in the United States. You may also see an addendum placed on the car if the dealer has added additional accessories or charges. Luckily, we made it possible to see the window sticker for any car by VIN.

The price you see on the window sticker has some built in profit for the dealer. Why then am I suggesting that dealers don’t really make money from selling new and used cars? It’s because most dealers don’t sell their cars at its list price. Most car deals are negotiated to a lower sale price.

How much do dealers mark up cars?

As a general rule of thumb, the mark up on a new car can range from as little as 2 or 3% for your economy brands (Kia, Hyundai, etc.), to more than 10% for luxury vehicles (Mercedes-Benz, BMW, etc.). Trucks are also known as high-margin sellers. The more luxurious and expensive the car, the more margin built into the MSRP price.

That means if you’re looking to buy a new Kia, and the total price listed on the window sticker is $18,000, there may only be $360 in profit built into the sale of that car. However, on the other end of the spectrum, a $150,000 Mercedes-Benz could have upwards of $15,000+ profit built into its list price.

Used cars follow this pattern as well. The cheaper the car, the less margin built into its list price. The more expensive the car, the more potential for markup. With used cars, dealers have to base their pricing on what the market is willing to pay.

On average, there is typically somewhere between $1,500 and $3,000 of margin built into used cars prices.

So do dealers make a killing selling new and used cars? 99% of the time the answer is no. Do some people overpay for a car, and the dealer makes a lot of front-end profit? Yes, but it doesn’t happen often.

During my career, I sold cars where we lost thousands of dollars on the front-end. Why did I let the customer get such a good deal? We did it in order to hit our monthly volume sales objectives from the manufacturer. Remember what I said before? Car dealerships are a lot like grocery stores, they depend on volume. That reality couldn’t be more true when dealers are incentivized to sell more cars with less profit built into each sale by the manufacturer.

How manufacturers push for profits

Manufacturers also incentivize dealers to sell more cars by setting lofty monthly, quarterly, and annual sales volume goals. If these sales goals are attained (and surpassed), result in hundreds of thousands, if not millions of dollars for the dealership.

It is in attaining these monthly, quarterly, and annual sales objectives that car dealers can make money from selling cars.

Why do manufacturers wave millions of dollars in front of dealerships to get them to take losing deals to hit their volume objectives? As with all “goals” or incentive plans, there is a psychological answer and a practical answer.

Manufacturers, many of which are publicly traded companies that have shareholders to please, need to show growth. How do you show growth? You sell more cars. How do you sell more cars? You incentivize your dealer network to sell more cars by losing money on the sale of each car.

Why does this work? Because investors and shareholders are more excited by growth (selling more cars), than by profits (actually making money on each car sold). In my estimation, these practices won’t last forever. But, for now, that’s the way the car business works.

Many dealerships will take losses on deals (especially towards the end of a month) in order to hit their factory incentive threshold. If a dealership doesn’t hit their goal set from the factory, they risk not making any money that month.

In my career, I’ve seen manufacturer incentives that pay dealerships based on what percentage of goal they attain. For example, let’s say a dealership has a goal of selling 100 new cars in June. If they attain 95 percent to 105 percent of that goal (95 to 105 cars sold), the factory will pay them $1,000 per car sold. But, if the dealership is able to attain between 105 and 115 percent of their goal the factory will pay $1,250 per car. It can go up from there.

Even with all this money being thrown around, car sales still represent a small profit generator for the dealership. At the end of the day, car sales exist to facilitate the other revenue generating areas of the dealership: the F&I office (aka the back-end), and the Service department.

Finance and Insurance (aka the back-end)

A growing area of importance for car dealerships is in the Finance and Insurance office. F&I, as it’s affectionately referred to, has always been an important revenue generator for car dealers, but now more than ever it’s becoming a major driver of profit.

If you’ve ever bought a car before, you’re very aware of the paperwork you need to sign before the car is officially yours. It’s a lot, and it can be quite intimidating. The process you went through was probably something like this:

1. Test drive a car;
2. Haggle on price with the salesperson;
3. Agree to a price;
4. Determine how you’re paying for the car (finance, lease, paying in cash);
5. Salesperson hands you off to the Finance Manager;
6. You spend hours reading through (or more accurately glancing at) hundreds of pages of documents;
7. You purchase an extended warranty because you think you might need it and the Finance Manager suggested it;
8. You drive home in your new car.

Yea, I know, buying a car is a real pain. 

Once you are “handed off” to the Finance Manager, you begin the second sales process. You thought that now that the salesperson was gone the sales process was over? No way!

Car dealerships make money in F&I in a few different ways.

Car dealerships markup loans

It’s important to understand that if you finance your purchase through a dealership they will make money on the loan. Don’t get too upset about this.

Car dealerships offer something to lending institutions that you and I can’t; volume. Generally speaking, car dealerships get access to loans at rates that individual consumers can’t. Dealers then mark up these loans and resell them to customers.

Keep in mind that you don’t have to get your car financed through a dealership. The next time you buy a car, you should consider getting a pre-approval on a loan from another lender. Use this as a comparison for what the dealer is able to quote you.

Car dealerships markup the money factor on leases

If you lease a car, dealers have a way to make some profit there too. Dealers make money by marking up the money factor on a lease. The lender charges the dealer a money factor of say, .00125, and the dealer marks it up 50, 75 or even 100 basis points. The difference between the buy rate (what the lender charges the dealer) and the marked up rate (what you’re quoted) is backend profit on the lease for the dealer.

Car dealerships make money selling warranties and more

In addition to profit generated from financing or leasing a car, dealers make money from selling different insurance packages or warranties: extended warranties, tire and wheel protection, so on and so forth. With each sale of an additional item, the dealer is making some profit. 

Good finance managers are like gold in the car business, and dealerships like to keep them around. Dealerships are also keen to invest in technology and software that increase their F&I margins.

These days, many dealers are investing in third party vendors to make the F&I process more pleasant for the customer. Solutions like docuPAD have been able to make the F&I process easier for the customer while simultaneously increasing the gross profit dealers receive. By empowering the customer to self select which warranties, protections, and plans they want, dealerships are realizing that they are able to sell even more products during the F&I process than ever before.

As a rule of thumb, dealerships can traditionally make much more profit on the backend of a car deal than on the frontend. Depending on the dealership, a “healthy” deal for the car dealer will result in $2,500 to $3,500 in frontend and backend gross profit combined. Remember very little of that will come from the actual sale of the vehicle.

Parts & Service Money Makers

By now you are starting to see how car dealerships truly make their money. Selling cars is simply a means to sell other products and services, and it’s through those other products and services that dealers make their money.

As far as products and services a car dealership has to offer, look no further than their parts and service department for a plethora of options. For all car dealerships, their primary revenue generator (and profit center) is the Parts and Service department.

Let’s start with the Parts department. The parts department at any car dealership keeps in stock a variety of relevant items that go towards fixing, maintaining, or upgrading a vehicle. From tires to shocks, a dealership’s parts department will have hundreds, if not thousands of unique items stocked at any given moment.

The Parts department sells these parts to three customers:

1. Consumers;
2. Other dealerships; and
3. Their own Service department.

Customer #1 is easy to understand. Let’s say you blow a tire in your Mazda and you show up at the local dealer to get it fixed. The parts department will happily sell you a replacement tire. In this instance, the dealership makes money off of selling you the marked up tire.

Customer #2 is also easy to understand. Let’s use the same example as above. This time, when you get to the dealership, they tell you they don’t have the tire you need. You ask the dealership to call another local dealer and buy the tire from them. In this case, the dealership that sold the tire made some money by selling it to another dealer.

Customer #3 is less obvious to someone who isn’t in the business, but it represents the most common customer of the Parts department; the dealership’s Service department. To keep using our example, instead of buying the tire outright from the dealer, and then going to an independent tire shop, you decide to simply let the dealership mount the new tire for you. In this case, on your invoice you’ll see charges for parts (the tire) and labor (mounting the tire). Yes, you, the customer are still paying for the tire. However, the dealer was able to bundle together the parts and service into one transaction. In these instances, the Service department is “buying” the part from the Parts department, and then charging you, the customer for both the parts and the labor.

For car dealers, it’s all about service absorption

The Service department is where car dealerships make most all of their money. In the business there is a concept called “service absorption.” Service absorption is the percentage that the Parts, Service and Body Shop operating gross covers of the total of its own entire combined department operating expenses PLUS the total of fixed expenses and dealer salary.

Car dealers aspire for 100% (or higher) service absorption, although most reach 70%. If a dealer attains 100% service absorption, that means that their Parts, Service, and Body Shop make enough profit to pay for all dealership expenses. Let that sink in for a moment…

How do dealers make money in the Service department then? By beating the book time associated with every vehicle that comes through the service lane.

For a Service department, it doesn’t matter if a vehicle is under warranty or not. Dealers will happily send invoices to manufacturer’s for cars under warranty. What is most important is that their mechanics can beat the book times stipulated for each job.

Auto repairs are charged based on how long a job should take, multiplied by a shop’s hourly rate. If a certain job should take four hours, and a mechanic can get it done in two, guess what the dealer is going to charge you for? Four hours of work. And, they’ll bill you at their hourly rate (which is generally going to be quite high).

This is how car dealerships make their money, by processing repairs, maintenance, and more through their service drive efficiently.

Other ways dealerships can make money

Up to now we’ve covered the traditional ways car dealers make money. There are a few nontraditional ways dealers (and more appropriately, their owners), can make money.

Savvy dealers make money from their dealership by owning the real estate that the dealership sits on. This is another way dealers can make a lot of money. Many dealers own the land they build their dealerships on, and then the dealership pays them rent each month to operate there. In my 42 years in the car business, I’ve seen dealers of all sizes make money from paying themselves rent.

I’m even aware of dealers who have repurposed an existing facility and rented it out to a competitor to sell a different brand. You can’t underestimate the value of the real estate that a dealership sits upon, that land is a veritable gold mine.

So there you have it, those are the myriad ways car dealerships make money.

FAQs About How Dealerships Make Money

Q: How do car dealerships make most of their money?
A: Most dealerships make the bulk of their profits from the Finance and Insurance (F&I) department and service and parts operations — not just car sales. While new car sales bring in revenue, the margins are often thin. Extended warranties, loan markups, and service contracts are where profits grow.

Q: Why do dealers mark up interest rates on car loans?
A: Dealers often partner with lenders and are allowed to mark up the buy rate (what the lender offers) to a higher rate for the buyer. The dealer keeps the difference, which can amount to hundreds or thousands of dollars over the life of the loan.

Q: Do dealerships make money on trade-ins?
A: Yes. Sometimes, dealerships appraise trade-ins at wholesale value and resell them at retail value. In other cases, the dealership sells the trade-in at a wholesale auction. The spread between what they pay and what they sell for is a key profit center.

Q: Are add-ons like extended warranties and gap insurance negotiable?
A: Absolutely. Many F&I products are marked up significantly, and dealers often have room to negotiate. You don’t have to buy these products on the spot — you can often find better deals from third-party providers like CarEdge.

Q: What’s the most profitable part of a dealership?
Typically, it’s the service and parts department, followed by F&I. Fixed operations (maintenance, repairs, and warranty work) provide recurring revenue long after the initial sale.

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