The Back-End Profit
What customers don’t know won’t hurt them. The price, trade-in value and interest rate are all printed on the sales contract for the customer to review. However, what most customers don’t realize is that the actual dealer profit is often hidden in the “Back-End” and is not disclosed in the sale. This “back-end” profit can be as much as half of the income that is made on a modern car sale. Furthermore, if a customer purchases a car through an Internet or Fleet Department, the dealer’s “back-end” income often accounts for most of the profit. The “back-end” can consist of profit made from the interest rate, money-factor, warranties and sealants (Mop-and-Glow). Also, the dealer’s “back-end” profit can be produced from add-on items such as accessories, alarm systems, gap-coverage, and insurance covering the loan (LA&H).
“Back-end” profit is generally built into the deal in the form of a “Leg” in the payment. For example, when you finance $30,000 at 6% APR, it produces a payment of $580. However, the salesman may close the deal at $30,000 with a payment of $590. Because this is a payment that is $10 higher than the interest rate would yield, it gives the dealer a hidden $10 per month. Since most of the “back-end” profit is generated by the finance department (F&I), his “leg” allows the “F&I” manager to sell warranties and sealants for a large profit without increasing the monthly payment dramatically.