An academic study disputes claims that dealerships routinely make thousands of dollars in profit when they arrange car loans.
"There's no evidence of that," said George Hoffer, an economics professor at Virginia Commonwealth University in Richmond, Va. With a colleague, Dave Harless, Hoffer studied new-vehicle profits on a variety of models. The Power Information Network provided those data.
The study, published in The American Economic Review, said the average dealership finance profit on a new vehicle in 2000 was $452. That figure represented roughly one-third of the total profit on the typical new vehicle sold that year.
Hoffer conceded that he did not have more recent data. But he said he had no reason to think the average finance profit has changed much.
The profit that dealerships make on loans by marking up the wholesale interest rate they get from lenders is under fire. Some consumer advocates want to eliminate those profits. Some regulators and plaintiffs' lawyers accuse dealerships of gouging many consumers on loans.
Hoffer, who conducts research for automakers, acknowledges that the typical interest-rate markup is significant. His research shows that dealerships grossed an average of $1,497 in 2000 on a new-vehicle sale, including the finance profit.
The National Automobile Dealers Association says the retail gross profit on the typical new-vehicle sale in 2003 was $1,488. In 2002, that figure was $1,531. NADA does not break out finance profits.
The typical finance profit does not approach the steep markups cited as evidence against dealerships and auto lenders in lawsuits that challenge loan practices, Hoffer says.
His research shows that dealerships made an average of $428 on extended service contracts and $61 on credit life insurance when they handled financing. Credit life insurance is designed to pay off a car loan if a buyer dies or is disabled.
"If you add the service contract, finance reserve and credit life, that is two-thirds of the profit on the car," Hoffer said. "That income is not insignificant."