Markup on luxury cars

As much as people obsess about negotiating the lowest possible price for a new car, that’s not where car dealerships make the most money.

That would be the Service and Parts Department, where you’re probably not going to be able to negotiate a cheaper hourly labor rate for work that’s not covered by your warranty. You’re not likely to get very far with your best offer for a replacement transmission or a set of tires, either.

The Finance & Insurance Department, where dealerships are open to negotiation, is also highly profitable.

Financial results for the six publicly traded, new-car dealer groups in the United States show that to a great extent, dealerships are in the business of selling new and used cars so they can service them and finance them.

Compared to the new-car department, gross profit margins for dealerships are much higher for service and parts; also for arranging financing; and for selling extras like extended-service contracts, often called “extended warranties.”

For extended-service contracts, the markup can be as high as 100 percent. Dealerships also make a profit on loans and leases negotiated at the dealership. In effect, the dealer gets a cut of the interest rate profit made by the lender.

Dealerships also sell “F&I” products like GAP, which is short for Guaranteed Asset Protection. If your car is stolen or totaled in an accident, GAP covers the difference between the remaining balance on your loan and the car’s actual value, which is often a lot less than the remaining balance.

In the fourth quarter, between the dealer markup on loans and leases, plus the sale of F&I products, the six publicly traded dealer groups averaged about $1, 100 per vehicle in F&I revenue. That average includes new and used cars and trucks.

For the Asbury Automotive Group, for instance, that means F&I represented only about 3 percent of revenues for 2011, but 20 percent of the gross profits.

Some consumer advocates, like the Center for Responsible Lending, argue that dealerships should at least disclose how much they make on loans and leases, and question whether they should be making anything at all on the interest rate.

Dealer groups and auto lenders argue that the ability to get financing at the dealership is convenient for customers. Dealerships typically send credit applications to multiple lenders, which compete for the business.