If you’ve ever tried buying a car (which you probably have, considering you’re reading this website) then you’ll no doubt have noticed that cars sold by individuals – aka “private sales” – are typically less expensive than buying the same car from a dealer.
For example, a car that might cost $10,000 private sale might cost more like $13,000 from a dealer – sometimes even more. The typical price difference will vary depending on the market in which you are purchasing, but long story short it is rare for a private sale vehicle to be less expensive than a dealership counterpart.
If you’re looking to get your hands on a new daily driver, or the sort of “modern classic” that we do buyer’s guides here for at Garage Dreams, then you’ll probably have figured out by now that you can typically get more car for your money by purchasing privately.
But why are private sale cars less expensive? Why do dealers charge more? And do you get anything extra from buying fro ma dealer?
In this article I’m going to explain the primary reasons for dealership cars being more expensive than private sale ones, as well as some considerations to make when considering whether buying privately or through a dealer is right for you.
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Dealerships Need To Turn A Profit – Private Sellers Don’t
The primary reason why cars cost more from dealerships than from private sellers is because a car dealer is in the business of selling cars, and therefore they need to turn a profit (on average) on the stock.
Unless you are flipping cars as a private individual, e.g. getting an in-demand car like the GR Yaris at launch and then reselling it to someone who doesn’t want to wait, you typically aren’t trying to sell your vehicle for a profit.
Instead, you are simply trying to minimise depreciation and get as much as you can for the car, which is a different matter altogether.
For example, my old Alfa Romeo 156 was purchased for around $3500 (if my memory serves me well). I sold it about 18 months later for $2750, after having spent around $1500 on repairs and maintenance. Not a terrible result, but hardly the stuff of Fortune 500 fame. My aim was not to generate a profit, but simply get as much of my initial purchase price and repair bills back as possible.
A dealership needs to charge a higher price on average for its vehicles, because they cannot survive long without turning a profit. There are also higher costs in the form of commercial real estate, staff, specialist insurance, marketing and advertising expenditure and more.
All of this needs to be factored in, helping to explain why dealership cars are more expensive.
It’s important to bear in mind that in many instances dealers aren’t making as big profits per car sold as you might think. I enjoy watching High Peak Autos on YouTube, and this particular dealer goes into quite extensive detail about many of his deals in terms of what it costs him to acquire a car, bring it up to standard, and then what he can sell it for profit wise. On many cars the profit doesn’t seem to be more than 500-1000 British pounds.
While this is not exactly “pocket change”, when you consider that there are still more expenses to come off the top (company insurance, paying any staff or contractors, keeping the lights on at the dealership etc) you can see clearly why a dealership must charge – on average – more money to be able to generate a profit and ultimately stay in business.
In some markets, typical profit margins may be even lower. There is a publicly-listed chain of used car dealerships here in New Zealand, whose sharemarket performance I follow. Based on their latest published financials, this dealership is averaging less than $250 profit per car sold before other costs of doing business are taken into account.
Dealerships Can Offer Finance More Easily
Another reason why private sellers typically cannot attract such a high price for their cars is due to the fact that dealerships can offer finance more easily.
Depending on where you live, it may or may not be easy to get finance on a private car transaction. With dealerships, finance is typically the “name of the game”.
From dodgy Buy Here Pay Here lots through to higher end establishments, a great deal of the motor trade is powered by finance.
Offering finance allows a buyer to purchase a car that is more expensive, because although the sticker price may be unaffordable (if it was a cash purchase) the “payment”/car note/whatever you call it in your neck of the woods makes the vehicle attainable.
For example, you might not be able to stump up $10,000 cash today, but you might be able to afford $100 per week for 36 months.
Credit products inflate the price of goods, by allowing the purchaser to pay back the cost (plus interest) over time.
In many instances it’s easier for a purchaser to walk into a dealership and buy a higher ticket price car on finance than it is to cash purchase a private sale vehicle.
Finance is also critical to dealerships in the sense that for many transactions it may be more of a profit generator than the car itself. The car is really just security against the loan not being paid back, and the dealership makes a cut on the finance.
Dealerships May Have Additional Obligations
Another factor behind dealerships charging more for cars than private sellers is that dealers will often have obligations in terms of after-sales support/warranty.
For example, here in New Zealand where I live, if you buy a car from a private seller and it breaks you are “shit out of luck” as the saying goes. In theory, if a private seller deliberately misrepresented the condition of the vehicle, then you could have a leg to stand on … but it’s unlikely.
On the other hand, registered motor vehicle traders have to comply with the “Consumer Guarantees Act”, which basically means that a good that is sold needs to be durable and reliable to the extent the average customer would expect considering what the item is and the price paid.
In practicality, this means that dealers may have to fork out for repairs on cars they have sold (before any kind of extended/aftermarket warranty is considered).
For example, when I bought my VW Touareg, it left me stranded on a roadtrip with what turned out to be a failed brake sensor that locked one wheel. The dealer had to pay for the repair out of their pocket. In fact, that was the second repair that the dealer had to do on their dime, the first being replacing the throttle body. Therefore, it’s entirely possible that their whole profit margin was eroded on the repairs.
Because of this risk, dealers need to carry more margin on their cars so that they can wear the cost of repairs for which they might be responsible. This means they need to charge more money, in the same way that health insurance is typically more expensive as you get older as the risk of paying out increases for the insurer.
Depending on where you live, the extent to which an auto dealership is ‘on the hook’ for any repairs or failures may vary. New Zealand has relatively robust consumer protection laws, whereas I believe (and please do correct me in the comment section) that the United States does not, or at least it varies state by state.
Recap – Why Do Dealerships Charge More Than Private Sellers?
Long story short, the primary reasons for dealerships typically charging more for cars are as follows:
- A dealership is in the business of buying and selling cars at a profit (versus a private seller who is typically trying to “dispose” of a car but not necessarily for profit). This – in conjunction with higher operating costs associated with running an actually business – means the dealership needs to sell at a higher price to actually have a chance of staying in business.
- Dealerships can usually offer finance more easily, and finance allows for a higher purchase price as you can pay the vehicle off over time (plus interest) rather than needing to pay all at once.
- Depending on where you live, a dealership may have additional obligations from a consumer protection perspective. For example, if the dealership sells you a car and it breaks down after a month, they might be on the hook for any repairs. This ‘cost of doing business’ has to be factored in, versus a private seller who typically doesn’t need to provide any form of after sales support.