While looking at the rows and rows of cars available on the lot of a car dealership you might find yourself wondering, do car dealerships own the cars they are selling? The short answer is it depends on the dealership. Car dealerships purchase and outright own the cars that they have on their lot, or they use special financing programs available through manufacturers.
They then sell these cars at a higher price to customers to see a profit and manage the overhead costs of running a dealership. Dealerships can buy the cars on their lots from several sources ranging from trade ins and auctions to purchasing directly from the manufacturer.
Most car dealerships acquire their vehicles using a tool called “floorplan financing”. This helps them keep a large stock of vehicles that are available to be driven off the lot as soon as they are bought. Until the time of the sale of the vehicle, the financer or lender holds the title of the car rather than the dealership itself.
What Is Floorplan Financing
Car dealerships use floorplan financing to finance their wide selection of cars. Maintaining a wide selection allows dealerships to meet customer needs without any lag time in supplying a vehicle and transferring ownership. If this financing option wasn’t available to dealerships, many customers would be forced to buy their cars via a catalogue which can take months before the car arrives at the dealership.
The lender for floorplan financing is often the manufacturer of the vehicle. They offer the dealership a budget, for example, over the course of a year they might extend a dealership a 2-million-dollar loan for 100 cars. While the car stays on the dealership’s lot the dealership makes payments to the manufacturer. This creates an added incentive to sell cars quickly.
The lender will check the dealer’s inventory often and if a car is taking too long to sell, they might ask the dealer to pay for the vehicle upfront to avoid any monetary loss as the car’s value depreciates over time.
Many used car dealerships use floorplan financing as well, but they can also own the vehicles on their lot outright. This is something that you will see more often with used car dealerships because of the lower cost of used cars. Used car dealerships might purchase the cars on their lots through trade ins or through auctions where the price of a vehicle is considerably lower than when buying new directly from the manufacturer.
Do Car Dealerships Pay Taxes on The Vehicles They Purchase
Car dealerships do not pay tax on the vehicles on their lot. They don’t pay taxes because they are a franchise, so it works much the same as when you buy items from a grocery store. Essentially, the tax is passed on to the customers like a sales tax.
You pay the sales tax when you buy a vehicle and then the dealership pays the sales tax to the government. When you finance through a car dealership, you are more likely to see the out-the-door cost of your car than if you choose to finance through your bank. This is because a dealership will roll all the taxes and other costs involved in the purchase of your car into one statement.
It’s important to call your dealership and ask for an out-the-door-cost before showing up to buy your car if you choose to finance your purchase yourself or through your bank. This can help you avoid any awkwardness when taxes and other fees drive the price up from the first sale quote.
Buy Used Cars for a Better Deal
When you buy a used car, you can avoid many of the extra expenses that come with buying a new car from a dealership. At Easterns Automotive, we use a meticulous multi-point certification test to ensure that when you buy a car from us you buy it with confidence that you are receiving a car that will work for you. We have been active in the D.C., Maryland and Virginia communities since 1988 and look forward to seeing you at one of our eight locations.
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