Buyer Tips

What is The Markup on a Used Car? How is it Calculated?

By Mike Richards Updated: 05/23/2019 Posted: 02/21/2019

When you buy a used car from a dealer, he is selling it at a profit. The markup varies, although it typically ranges between 25% and 45%. If you are considering buying a used car, visiting various car selling sites, including auction sites, to get the best price possible is the best option. Remember that buying a car at a lower cost does not mean you got the best deal. It is important to consider the condition of the car against the given price.

Factors that Influence the Markup on a Used Car

Type and Cost of Repairs

Sometimes the markup put on a used car includes the cost of repairs that may have been incurred by the dealer. When the dealer takes care of costly repairs to make sure the car is roadworthy, the markup is usually higher than for a car that needs only minor repairs. Dealers choose to make repairs to ensure the car sells as fast as possible. Keeping a car for too long is not profitable for dealerships. Most buyers tend to focus on used cars with minimal or no repairs needed over those that need extensive repairs.

repairing car

How Much the Dealer Paid for the Car

Dealers get used cars from private sellers, especially those interested in a trade in, at auctions, and from wholesalers. These prices vary depending on the market demand, age, mileage, make and model of the car. If the dealer buys the car at a high price, the used car will cost more than at a dealership that bought the car at a lower price. Sometimes a dealer is willing to pay more for a car that has a huge market demand. Black book values help dealers when they are making decisions on which cars to buy and the best price to pay for them. They do this knowing they will recover their investment quickly.

Overhead Costs

If the dealer incurred transport costs, this will be factored in the final price of the car. The distance from the dealership plays a critical role in the overhead costs incurred. When the dealer puts his markup, the price of a car that had more overhead costs will have a higher price. Dealers sometimes opt to buy cars that are further away because of the price. Even with the additional transportation costs, the final price of the car may not be as high as a car bought from a location close to the dealership. Overhead costs are a very important factor dealers have to consider. Many dealerships are not ready to incur huge overhead costs if the final price of the car will be too high for buyers of used cars.


Profit Objectives of the Dealership

Dealers have a profit margin below which they are not willing to sell a car. For some dealerships, the profit margin is 20%, while others may go as high as 50%. The profit objectives are often determined by the operational costs of the dealership. The profit earned after the sale of the used cars is used to meet the various costs incurred in the running of the business. These costs include salaries, marketing, processing fees, and rent. A dealership with high operational costs but with fewer car sales is likely to have a higher profit objective compared to one with more sales and lower operation costs.

Further Reading

The Condition of Sale

Some buyers look for salvage cars and are willing to buy a car irrespective of its condition. Dealerships that sell salvage cars do not incur any repair costs. Buyers of salvage cars expect to buy them in the condition they are in. The markup for these cars depends on the extent of the damage. If a dealer, for example, buys a car that has damage on the body but has an excellent engine at a low price, his markup is likely to be higher than a car that has greater damage. Dealers are very careful when selling salvage cars. They will not invest in a car that is likely to remain in the lot for years.

Possibilities of Negotiation

When dealers put a markup on used cars, they expect buyers to attempt to get it at a lower price. Any used car buyer would be tempted to buy a car if they will be paying less than the advertised price. Dealers tend to have a higher markup to give room for negotiation. This way, even at the agreed amount, the dealer still sells the car at a profit. Failure to do this means the dealership will be selling the used car for far less than they were willing to and this may affect the operations at the dealership.

car dealer

The Size of the Lot

How many cars a dealership has in its lot plays a significant role on how many potential used car buyers will visit. Buyers know they have a greater possibility of getting a car in a lot that offers variety over one that is limited. To attract more clients, a dealer with fewer cars may choose to have a smaller markup. Some dealerships have clients buying used cars, not because they are cheaper, but because they have built credibility. Used car buyers want to be sure they are getting good cars. However, someone new in the business may have to sacrifice his profit margins until his dealership gains more visibility and clients.

When buying a used car, it is important to remember the person selling the car is in business and is doing so to gain a profit. How big the profit varies on individual needs and market demands. For you to get the best deal possible, you could start by looking at credible sites, such as Kelley blue book, to have an idea of the price of the car you would wish to buy. The prices vary depending on the model and type of car. It is essential for you to have an idea of the used car you would wish to buy. Having several options will help you decide faster based on your budget and personal preference.

You can always save on the cost of this markup, by buying cars from auctions.