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Back before many of us were born, people liked dealers. In the mid-20th century, automakers were greedy and charged too much for cars. Uncle Sam stepped in and solved this problem and passed many dealer and franchise laws that prohibited any automaker from selling their cars directly to the customer.

This worked out well until dealers found out that they can use this to their advantage. When the Oil Crisis of the 1970s occurred, dealers everywhere started pushing their manufacturer’s economical models. Because of this high demand, they also pushed the prices as well with markups as high as 20% back then. The interesting thing is, we still remember a time when you could buy a brand-new car from a dealer under MSRP. Today you have a better chance of becoming president and getting a car for MSRP.

Kate Manos expressed her anger on Facebook’s Toyota RAV4 Hybrid Group saying, “My husband and I have been excited about getting a new RAV4 hybrid, but we live in the Chicago area and dealers all seem to have markups even if the dealership doesn’t call it a markup. And the markup is taxable!” Granted, every state has its own different laws on buying and selling vehicles. However, this article is more focused on why dealers are marking up in the first place.

A dealer holdback is the amount of money the manufacturer gives back to the dealer once the car is sold. For Toyota, this amount is 2% of the MSRP of the car. Hypothetically, a dealer could sell a car under MSRP and still get a dealer holdback. So in laymen’s terms, a dealer marks up its price and tells the customer that they have to because they “got to stay in business” Sell the car for over MSRP, keep anything over MSRP, and still get the dealer holdback sent to them.

Here is Edmund’s explanation, “On a $20,000 car, a holdback represents $200 to $400. The holdback allows dealers to sell a car at invoice price, or even below invoice, but still receive money to cover the costs of doing business (advertising, sales commissions, etc.).” In 2016, the average car dealer sold 1045 cars that year (carprousa.com). Now just imagine the money that these dealers made after selling those cars.

You may think that making $200 per car is not enough to keep a dealership in business but remember that a dealer doesn’t make all its money from just selling. Dealers also make money by the one thing you hate…the service center. While most of your repairs on your brand-new car are covered by a warranty, the dealer still gets paid. A dealer also makes money by selling merchandise, sponsorships, and promotions. Our pee-wee soccer jerseys had our local Honda dealership printed all over them.

Given the fact that once upon a time a dealer could make money by selling for MSRP or less, that time is over. Today a dealer chooses to sell its car for over MSRP just so they can take advantage of the market. I am all for capitalism but once you mix in greed, it becomes a pure annoyance. Don’t get me wrong, there are dealers out there who really think for the people and are in the business of selling cars and not ripping you off. Dealers were created to stop manufacturers from ripping you off yet the tables have turned.

The only way to combat this is to be smart and have great negotiating skills. Know how a dealer makes money and you can bring the price down significantly. Remember, you are the customer buying something that’s negotiable. This isn’t the bananas at Walmart, you are buying something that will serve you for many years. You deserve the right to negotiate prices down and with this knowledge, you can now do that with ease.

What do you think? Did you buy your car over MSRP within these past 2 years? Let us know in the comments below.

Harutiun Hareyan is reporting Toyota news at Torque News. His automotive interests and vast experience test-riding new cars give his stories a sense of authenticity and unique insights. Follow Harutiun on Twitter at @HareyanHarutiun for daily Toyota news.