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How Do Wholesale Car Dealers Make Money? (4 Smart Ways They Profit)

Wholesalers and how they work have always been a bit of a mystery, even for auto industry insiders. They are known to acquire the inventory that a dealership can’t sell and somehow get another dealership to buy it. Although all these processes can be quite confusing, but successful wholesalers can sell cars wholesale largely because of their knack for valuing used vehicles. They’ve also built up a network of dealers over the course of years.

When a wholesale vehicle comes along, they know what it’s worth in the right market on the lot of the right dealer. Low overhead is one crucial factor that has helped traditional wholesalers remain profitable. In some states, wholesalers don’t even require a physical storefront or insurance. They just need a wholesale license and adequate capital to buy their first vehicle.

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Note that so many dealers don’t trust wholesalers after having less than positive experiences with them. Coupled with time-consuming negotiations, dealership owners can end up with checks that bounce when the wholesaler can’t honor the payment. However, the industry is now evolving, and it is evolving in a way that’s doesn’t support the traditional wholesaler in the way it used to.

Have it in mind that access to information has put a lot more power in the hands of dealers. In this technological age, there is now an abundance of pricing data online that’s up-to-date and being added to every day. More transparency has helped used car managers equal the pricing playing field with wholesalers.

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Also note that the rise of online auctions has drastically changed wholesaling. Traditional wholesalers were once believed to be more cost effective than auctions. Wholesaling at a physical auction involved transporting the vehicle and going to the auction where dealers would compete with a number of similar bargain buyers to get the attention of a limited number of buyers.

However, online auctions have entirely reinvented the process, much to the benefit of dealerships. These days, cars don’t have to show up at an auction location and the pool of buyers is much, much larger online. This new wholesale option has diminished the advantage of selling aged inventory to a traditional wholesaler.

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Indeed, selling cars wholesale used to be time-consuming, tedious, and riskier for dealers that hadn’t made strategic partnerships. Howbeit, some pros who have been in the business for years understand how to make money wholesaling cars the traditional way.

Understanding how to buy wholesale cars without having to wait for a local wholesaler to find what you need gives dealers more control over their used inventory. Note that it doesn’t necessarily replace traditional wholesalers who seem to always find a way to carve out a piece of the action.

4 Common Ways Wholesale Car Dealers Make Money

Indeed car dealerships can’t exist unless they are profitable. That is true for every business, from a neighborhood dry cleaner to a mega-retailer like Walmart. For wholesale car dealers, the rows of shiny new cars might prompt shoppers to believe that they’re where the business makes most of its money. Nonetheless, here are the basic revenue streams of wholesale car dealers;

  1. Car Sales

Yes, dealers make money on each car they sell. But often, that profit comes from the manufacturer, not the customer. “Dealer holdback” is money that is given to the dealership by the manufacturer when the car is sold. This is usually no more than three percent, but it puts money in the dealership’s pocket.

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Also, there’s a thing called “dealer cash” that is used by the manufacturer to give the dealer a reason to make sure that each car rolls off the lot. Dealer cash incentives are often tied to particular models

In addition, there is the practice of “stair-step incentives” in which the manufacturer pays the dealership for the total number of cars sold in a given period and typically this builds throughout the year. Therefore, while the dealership may earn a single sum for the number of cars sold in a given month, that sum may jump up for a larger number sold that quarter and an even larger number sold for the year.

  1. Arranging Car Loans

Car loans make dealerships money and it is here they increase revenue through extended service plans and marked-up finance rates, which is a big area of profit for dealers. Dealerships ‘buy’ financing at one rate and ‘sell’ it to customers at another and keep the difference.

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Have it in mind that this can add up to thousands of dollars over the life of a loan. However, this also means that loan rates are a negotiable item for dealerships, too: if they are feeling pressured to hit a sales goal, they may be able to lower a customer’s loan rate to meet or beat that of a bank.

Dealers also can profit from what is called “gap insurance”. For instance, if a car gets totaled, this insurance will pay off the difference between what the insurance company pays for the car and the amount borrowed to buy the car. Gap insurance is usually only recommended to buyers who make a very small down payment on a car and finance most of the purchase.

  1. Trade-Ins

Indeed, most people are aware the car salesperson is working for a commission and that means the salesperson wants to sell them a car for more than they want to pay. Normally, when a car buyer is in the market for a new car, there is also going to be a trade-in to use for negotiating purposes.

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This is when a person brings their used car to the dealer and trades it in to get a newer model. The customer’s car was most likely purchased or leased new…and now they want a new model. The dealer will offer that person a dealer-trade in value (which is usually at or below the wholesale value).

Dealers get all types of trade-ins. Many dealers will wholesale their older vehicles or high-mile vehicles if they sit on their lot too long. Note that this is where car dealerships can make money, too, if the buyer does not know what the trade-in is worth.

  1. Add-ons

Wholesale car dealers also make more money by selling add-ons, such as an extended warranty, gap insurance, or other accessories to car buyers – adding another $750 to $2,000 to their bottom line. If you are going to be servicing your car at their dealership, they stand to make even more profit through parts and service – easily adding another $3,000 of profit over the life of the vehicle.

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Most dealers don’t generate the bulk of their profits on the sale of a new car. The big profit usually comes through arranging car loans, selling add-ons, and making money on your trade-in. Wholesale Car Dealers can easily make a profit of $3,000 just through the financing alone.

If you have a trade-in, a dealer can make another $2,000 on that. They simply low-ball your trade-in, then turn around and sell it for a nice profit. Howbeit, if you only focus on the price of the car, you may not think the dealer is making much money, but when you factor in all these other things, a dealer can make $10,000 profit off of just one sale. However, that large a profit is not typical, but most dealers do make the bulk of their profit in areas other than the actual sale of the vehicle.