Do Dealerships Get Paid for Financing?

Do Dealerships Get Paid For Financing?

When you financing a vehicle through the dealership where you are purchasing it, that dealership receives compensation from the lender for arranging the financing. This dealer participation in the financing process can take several forms and is an important profit source for dealerships.

Understanding how dealers get paid for financing helps consumers make wise decisions when purchasing and financing a car. Let’s examine how dealership financing works in more detail:

What is Dealer Reserve?

The most common way a dealership profits from arranging financing is through something called dealer reserve or dealer participation.

Here’s a step-by-step look at how dealer reserve works:

A customer with a certain credit score applies to finance a vehicle purchase at the dealership. The dealership submits the customer’s credit application to lending institutions they work with.

One of the lenders reviews the application and approves the customer for a certain loan amount at an interest rate they will charge the dealer, known as the “buy rate.” For example, 5%.The dealership then quotes a higher interest rate to the customer than the buy rate they received from the lender, such as 7%.

The difference between the buy rate (5%) and the higher retail rate offered to the customer (7%) is kept by the dealer as compensation for arranging the financing. This difference is referred to as dealer reserve.

The amount of dealer reserve can vary transaction-to-transaction, but often ranges from 0.5% to 2% of the loan amount. The dealer reserve provides revenue to the dealer for each vehicle purchase financed through them.

Additional Fees in Financing

Along with the dealer reserve interest rate markup, dealers can make extra profit on financing deals by:

  • Adding documentation fees and other charges when preparing the sales contract
  • Selling add-on products like extended warranties and gap insurance and packing them into the financed amount
  • Collecting per-transaction flat fees or bonuses from certain lenders they partner with
  • Taking a portion of the reserve as a flat administrative fee before passing the remainder to the dealer

All of these fees contribute to higher costs for customers who agree to dealership-arranged financing.

Additional Fees In Financing
Additional Fees in Financing

Why Dealers Like Their Own Financing

Now that you understand how dealers make extra money by handling the financing on their vehicle sales, the reasons why they push their own financing options becomes clearer:

  • Earns interest rate markup revenue through dealer reserve on each sale
  • Allows easy packaging of high-profit add-ons like warranties into the loan
  • Strengthens business relationships with partner lenders
  • Allows dealers to capture financing profits rather than letting customers pay cash or use outside financing
  • May help sell vehicles faster by having simple on-site financing approval
  • Vehicle manufacturers incentivize dealers to hit financing volume targets
  • Convenient on-site financing can provide a competitive advantage over other dealers

Clearly, handling the financing transactions themselves via discount auto loans provides significant benefits to a dealership’s bottom line. Consumers should be aware of these motivations when negotiating the financing for a vehicle purchase.

Hidden Markups in Dealership Financing

Not all markups by dealers in arranging financing are obvious. Some ways dealers sneak in hidden markups include:

  • Inflating the customer’s income on the credit application to get the lender to approve a larger loan amount
  • Packing the deal with overpriced add-on products portrayed as required when they are actually optional
  • Adding extra fees described as necessary documentation or processing fees but are actually pure dealer profit
  • Structuring the loan terms to have a balloon payment disguised as a final “large payment” due but is designed to force the customer to refinance down the road
  • Tacking on extra interest rate margin ABOVE the normal dealer reserve they get from the lender

These types of hidden markup schemes can really boost dealer profits but also inflate costs for customers who use dealership financing. Customers should pay close attention to avoid being exploited by these predatory practices.

Hidden Markups In Dealership Financing
Hidden Markups in Dealership Financing

Do All Dealers Mark Up Rates?

While marking up interest rates from the wholesale “buy rates” dealers receive from lenders is quite common, not every dealership marks up every loan. Here are some important points to keep in mind:

  • Franchise new car dealers that sell brands like Toyota, Ford, etc. are more likely to engage in rate markups, especially on new car loans
  • Smaller independent used car dealers may be less likely to markup rates
  • Markup amounts can vary significantly by dealer. Some may markup the minimum they can get away with while others markup to the highest amount the lender allows
  • A few state laws prohibit or cap interest rate markups by auto dealers, but in most states it is unregulated
  • Individual dealership policies may prohibit rate markups on certain promoted sales events or used car specials to offer extra value

Because practices vary so widely, it’s impossible to know for sure if a dealer will markup your rate without asking directly during purchase negotiations. Don’t assume rate markups will or won’t happen until you get clear confirmation from the dealer/lender.

The Risks of Dealership Financing

On the surface, arranging financing through the selling dealership may seem convenient as a one-stop process. However, there are some potential downsides customers should be aware of:

Higher Interest Rates – Markups by the dealer mean higher rates than the lender initially approved. You also miss out on competing marketplace loan rates.

More Fees – Documentation fees, acquisition fees and other charges often get tacked onto dealership-arranged loans.

Loan Packing – Easy ability for dealers to pack in overpriced back-end products like service contracts you may not want or need.

Higher Monthly Payments – Markups and packed add-ons mean higher monthly payments over the life of the loan.

Prepayment Penalties – Loans arranged through dealers sometimes come with penalties if you refinance or pay off early.

Inflexible Loan Terms – Dealer financing may come with non-negotiable, one-size-fits-all loan requirements.

Spot Delivery Scams – Dealers deliver vehicles before financing is 100% finalized, opening the door for yo-yo scams.

While dealership financing can certainly be faster and more convenient, recognizing the additional costs and risks involved allows customers to make better informed decisions about their best options.

The Risks Of Dealership Financing
The Risks of Dealership Financing

How Dealerships Calculate Financing Payments

To properly assess a dealership’s auto financing offer, it helps to understand how they calculate the all-important monthly payment amount. Dealers determine monthly payments using this formula:

Loan Amount – The total being financed which may include the negotiated vehicle price plus any add-ons like warranties, insurance, etc.

Interest Rate – This base rate gets marked up by the dealer reserve amount as described earlier. Can have a huge impact on overall cost.

Loan Term Length – Typically 36, 48, 60 or 72 month loan terms are offered, but any timeframe is possible depending on the lender.

Down Payment – The more money put down, the lower the financed amount and monthly payments.

Dealerships manipulate these key factors when presenting financing offers to customers. Savvy buyers should pay close attention to how each one affects the monthly payment and overall loan cost. Don’t get distracted only by the monthly payment amount.

How to Get the Best Deal from Dealership Financing

Given the additional costs and risks of dealership-arranged financing, is it ever a good idea to agree to it? There are some scenarios where it may make sense IF you take steps to get the best deal possible:

  • Shop around at banks/credit unions to get pre-approved financing rates as a baseline bargaining chip before ever visiting the dealer
  • Negotiate the vehicle purchase price completely separately from any financing discussions
  • Be upfront with the dealer that you already have financing pre-approved but are willing to consider their best offer
  • Make the dealer match or beat the interest rate you already have pre-approved
  • Read all financing contract paperwork closely to ensure the rate and terms match what was agreed verbally
  • Decline all backend add-on products you don’t feel are necessary – don’t get pressured
  • If possible, have the dealer agree in writing not to markup the rate from the lender buy rate

While dealership financing should not be considered lightly, being an informed negotiator can help ensure you get treated fairly and don’t overpay.

Auto Financing Options Other than the Dealer

If you want to avoid the pitfalls of dealership-arranged financing, here are some alternative auto financing options to consider:

Banks – Both national banks and local community banks can offer very competitive interest rates on auto loans.

Credit Unions – For credit union members, financing from your credit union should be a top choice to consider.

Online Lenders – Companies like Lightstream, PenFed and LendingTree provide online loan approval and funding.

Manufacturer Financing – Most automakers have “captive” financing arms with loan programs offering low rates.

Personal Loans – Using a personal installment loan from your bank for a car purchase may provide lower rates than some dealer financing.

401(k) Loans – Borrowing against a 401(k) retirement account allows access to low interest rate funds and paying yourself back over time.

Home Equity Loan – Tapping available equity in your home via a home equity loan or line of credit (HELOC) can offer low interest vehicle financing.

Savvy buyers should explore multiple financing avenues beyond just the selling dealer to ensure they get the lowest rates and best terms. The best leverage is having pre-approved financing before ever entering negotiations with a dealer.

Warning Signs of Potential Dealer Financing Scams

While most dealerships operate ethically, there are some warning signs of potential scams perpetrated by shady dealers to watch out for when financing:

  • Suddenly changing financing terms after you took delivery of the vehicle
  • Using deceptive tactics like hiding finance charges in the paperwork
  • Lying about your income or other application info to get loan approved
  • Charging fees significantly higher than disclosed or for phony services
  • Unexpected add-ons appearing on the contract you didn’t agree to
  • Requiring useless add-on products in order to get approved
  • Overcharging on interest rate without reasonable explanation
  • Falsely claiming financing was completely finalized and papers signed

What Questions Should You Ask about Dealership Financing?

To determine if accepting dealership-arranged financing makes sense in your particular situation, here are key questions you should get answers for:

  • What is the buy rate you received for my credit score, and how much are you marking it up?
  • Can you offer financing at the wholesale buy rate with no dealer markup?
  • Will the loan have early payoff penalties if I refinance later?
  • What is the total amount of fees being charged on the loan?
  • What backend products like warranties are baked into the monthly payment amount?
  • If I pay cash, will you offer a lower vehicle purchase price?
  • Will you match or beat the rate I have from my outside pre-approval?

Other Steps to Take to Avoid Overpaying on Financing

Beyond asking the right questions, here are other smart tips to follow to prevent overpaying when financing through a dealer:

  • Negotiate the vehicle price separately before discussing financing
  • Thoroughly inspect all financing documents before signing
  • Make the monthly payment amounts match your budget, not the dealer’s
  • Require the dealer put any promises they make in writing
  • Use your own calculator to verify payment amounts quoted
  • Avoid “spot delivery” scams by not taking the vehicle until financing is 100% complete
  • Consider having an attorney review the financing agreement if you have concerns
  • Be willing to walk away from any deal that seems ethically questionable

Being an educated consumer is your best protection against predatory lending practices. Take your time and don’t get pressured into making quick decisions.


Q: Who is the #1 highest volume car dealership?

A: AutoNation sells over 500,000 new and used vehicles annually, more than any other dealership group. They have over 300 stores coast to coast.

Q: How do mega-dealers sell so many cars?

A: Factors like nationwide presence, strong branding, no-haggle pricing, broad brand mix, digital sales capabilities, and loyalty programs drive high volumes.

Q: Do local dealerships stand a chance against national chains?

A: Yes, some regional groups like Serra Automotive dominate their local markets through brand dominance in a single metro area.

Q: What is expected of high-volume dealers in the future?

A: Further consolidation, increased online sales, wider brand diversity, improved digital marketing, and a focus on service/parts to compensate for slim new car margins.

Q: Can small independent dealers compete on volume?

A: It’s unlikely due to lack of economies of scale. Independent dealers can thrive by focusing on community ties, customer service and niche demographics.


In conclusion, AutoNation leads the pack as America’s highest volume auto retailer, retailing over 500,000 units across its national chain annually. Mega-dealer groups like AutoNation, Penske, and Sonic thrive through capabilities like coast-to-coast

presence, strong branding, efficient sales processes, and breadth of brand mix. Local groups can also succeed through regional dominance. As the market evolves, national chains will expand via further consolidation, online sales and diverse brand lineups.

But locally focused dealerships continue playing an important role in their communities by tailoring to local needs. Understanding differences between high-volume retailers and smaller independent dealers provides helpful perspective for today’s car buyers.

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