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A Guide to Car Dealerships: How They Operate, What to Expect, and Tips for Getting the Best Deal

Car dealerships are a central hub for buying, selling, and servicing vehicles. They range from large, multi-brand dealerships to smaller, independently owned lots, and each type offers a different experience for customers looking to purchase a car or have their vehicle serviced. Understanding how dealerships operate and what to expect from them can help buyers navigate the process smoothly, avoid pitfalls, and make informed decisions.

Here, we’ll dive into what car dealerships do, the various types, how they make a profit, and tips for getting the best deal on your next car purchase.

What Do Car Dealerships Do?

A car dealership is a business that sells new or used vehicles at the retail level, often based on a contract with an automaker or car manufacturer. Dealerships provide a range of services, including:

1. New and Used Car Sales: Dealerships are the primary places for customers to buy new cars, and many also sell pre-owned (used) cars. Larger dealerships may offer certified pre-owned (CPO) vehicles, which are used cars that have been inspected and certified by the automaker.
2. Financing Options: Most dealerships provide financing options, often through partnerships with banks or financing companies. Financing helps customers purchase cars with loans or lease agreements, offering flexibility in payment terms.
3. Car Maintenance and Repair Services: Many dealerships have service departments staffed with certified technicians who handle everything from routine maintenance (like oil changes) to more complex repairs. This can be convenient for customers who want factory-authorized service for their specific make and model.
4. Parts and Accessories: Dealerships also sell genuine OEM (Original Equipment Manufacturer) parts, accessories, and upgrades that are designed specifically for the vehicle brands they carry.
5. Trade-Ins: Dealerships often accept trade-ins, allowing customers to use the value of their current vehicle toward the purchase of a new or used car. The dealership typically appraises the trade-in’s value and includes it in the purchase deal.

Types of Car Dealerships

There are several types of car dealerships, each serving different customer needs:

1. Franchised Dealerships: These dealerships have agreements with specific automakers, allowing them to sell certain brands. They carry new vehicles directly from the manufacturer and typically have a larger selection of certified pre-owned cars.
2. Independent Dealerships: Independent dealerships sell used cars and operate without a direct relationship with a particular manufacturer. They often have a broad selection of used cars across various brands and may offer lower prices, though they may not always include certified pre-owned vehicles.
3. Buy Here, Pay Here (BHPH) Dealerships: BHPH dealerships provide in-house financing directly to customers, often catering to those with less-than-perfect credit. However, interest rates tend to be higher, and the vehicle selection may be limited.
4. Luxury and Specialty Dealerships: These dealerships focus on high-end or specialty vehicles, such as luxury brands (e.g., Mercedes-Benz, BMW) or exotic cars. They offer specialized financing and leasing options, and the buying experience often includes personalized services.
5. Online Dealerships: New online platforms, like Carvana and Vroom, offer a digital-only experience where customers can browse, finance, and buy vehicles online, with delivery options to the buyer’s home. Many traditional dealerships have also expanded their online offerings to compete with these new models.

How Dealerships Make a Profit

Car dealerships make money through several revenue streams:

1. Vehicle Sales: New and used car sales contribute to a significant portion of a dealership’s revenue. However, the profit margin on new car sales is relatively low, as dealerships often operate in a highly competitive market and frequently offer incentives and discounts.
2. Financing and Insurance: Dealerships often earn a commission on financing and insurance products, such as extended warranties, GAP insurance, and other add-ons. These extras can add to the dealership’s bottom line, sometimes more than the vehicle sale itself.
3. Service and Parts: The service department is one of the most profitable sections of a dealership. Routine maintenance, repairs, and sales of OEM parts provide steady revenue and higher profit margins than new car sales.
4. Trade-Ins: Trade-ins can be profitable for dealerships, especially if they sell used cars. After appraising a trade-in, they may sell it as a used vehicle at a markup or auction it off for a profit.
5. Add-Ons and Accessories: Dealerships often offer add-ons like extended warranties, rust-proofing, window tinting, and other vehicle accessories that can increase the overall price of the car. These add-ons often have a high-profit margin.

The Car Buying Process

Understanding the car-buying process can help customers make more informed decisions and avoid common pitfalls. Here’s what typically happens:

1. Research and Selection: Customers often begin by researching the type of car they want, either by visiting dealerships or using online tools to compare makes, models, and features. When possible, it’s helpful to test drive a few models before committing to a purchase.
2. Negotiation: Pricing at a dealership isn’t always set in stone. Many dealerships expect some negotiation, especially for new cars. Research the car’s market value (e.g., using resources like Kelley Blue Book) to have a clear understanding of a fair price.
3. Financing and Trade-In Appraisal: After agreeing on a vehicle price, the next steps typically involve financing and trade-in appraisals (if applicable). Dealerships offer financing options, but it’s wise to compare these rates with your bank or credit union.
4. Add-Ons and Extras: Once financing is arranged, dealerships often offer optional add-ons, such as extended warranties and protection packages. Some of these may be beneficial, but they can also inflate the total price. Evaluate which add-ons are worth the cost based on your needs.
5. Finalizing the Purchase: Once all details are agreed upon, the buyer will sign the necessary paperwork, complete any remaining financial requirements, and receive the vehicle. Some dealerships also offer delivery options, so you can have your car brought to your home.

Tips for Getting the Best Deal at a Car Dealership

Buying a car can be an expensive and sometimes overwhelming experience, but these tips can help you get the best deal:

1. Do Your Research: Check prices, features, and reviews of the vehicle you want. Knowing the average market price and understanding dealer incentives will give you leverage during negotiations.
2. Get Pre-Approved for Financing: Securing a loan from a bank or credit union before visiting a dealership can save you money. It allows you to compare rates with the dealership’s financing options and gives you more control over the terms.
3. Negotiate the Out-the-Door Price: Instead of focusing on the monthly payment, negotiate the total price of the car, including taxes, fees, and add-ons. This approach prevents the dealership from stretching out loan terms to offer lower monthly payments at a higher overall cost.
4. Beware of Add-Ons: Dealerships make significant profits from add-ons and warranties. Only agree to those that offer real value and skip unnecessary extras.
5. Timing Can Matter: Dealerships often have monthly, quarterly, or annual sales goals. Visiting at the end of the month or during year-end sales events can increase your chances of getting a better deal, as salespeople may be more motivated to close deals to meet targets.
6. Consider Certified Pre-Owned (CPO) Vehicles: CPO vehicles are used cars that have been inspected and certified by the manufacturer. They offer many of the benefits of a new car, such as warranty coverage, but at a lower price.
7. Bring a Friend or Trusted Advisor: Bringing someone with car knowledge or negotiation skills can help you stay grounded, avoid hasty decisions, and feel more confident during the process.

The Future of Car Dealerships

With the rise of online car-buying platforms, the traditional car dealership model is evolving. Many dealerships now offer online browsing, digital financing, and home delivery to compete with companies like Carvana. In addition, electric vehicles (EVs) are changing the nature of dealerships, as EVs often require less maintenance and thus could impact service department revenue. Many automakers are also exploring direct-to-consumer sales models, particularly for EVs.

Car dealerships are an integral part of the vehicle buying and maintenance process, offering a range of services that help consumers find, finance, and care for their cars. By understanding how dealerships operate and taking a strategic approach to the car-buying process, you can secure a great deal and have a positive dealership experience. Whether you’re buying new, used, or simply having your vehicle serviced, dealerships provide a wide array of resources to meet the needs of today’s car buyers.