One in five new car shoppers in 2025 took on a payment of over $1,000. How did we get here? Car prices have gone up drastically since co with the average new car loan now sitting over 43 grand and the average car payment sitting at $748. Tariffs and other economic factors have also hurt the car market. But there's a common thread that isn't a new development, and that is dealerships.
Dealerships account for three out of four car purchases in the US. And that's more than a little scary because when you start looking under the hood car reference, it doesn't take long to see that car dealerships are a giant machine that gets you to spend more and take on extra debt by basically forcing you into psychological warfare. Let’s explore dealerships, how they work, why they're such a problem, and what we can do about it.
When you go to buy a car, you're not going to the Toyota store or Nissan etc. You're going to a locally owned dealership. Dealerships operate as a middleman between car manufacturers and the consumer, aka you. Their mere existence makes cars way more expensive. In fact, a new report estimates that the dealership model adds up to $5,000 to the price of a new car. And it's not hard to see why. Operating a dealership comes with lots of expenses. You got to pay the sales staff. Keep the lights on etc.
Why don't car manufacturers simply sell directly to consumers? Well, fun fact, they can't. Most states have laws requiring car manufacturers to sell their cars through dealerships. And most of these laws were passed decades ago with the goal of keeping manufacturers from undercutting local dealers and putting them out of business. And while some newer companies like Tesla have implemented clever workarounds for these policies, pretty much everyone else is stuck with them.
The dealership business model practically forces them to manipulate your psychology. Dealers know that your likelihood to pull the trigger on a car purchase comes down to the mood you're in, followed by the actual financial numbers. And they can manipulate both until you leave happy. It starts with the visual experience. The shiny office building, the strategic lighting, the Chevy spark on the rotating platform like it's starring in a Broadway show. But let's take a look at what these dealerships have turned into. While your vehicle is being serviced or you're in the final steps of the buying process, you're welcome to relax or work in our cafe area, kids room, or our private business lounges.
And now, an even bigger psychological ploy, the test drive. A test drive can help you decide on the make and model that you want. But often those test drives become a gateway drug. It's a lot harder to say no to a car you can't afford after you felt those leather heated seats in that 600 horsepower. 2024 survey found that three out of four car buyers said the test drive alone sold them on the vehicle they finally purchased. And car dealerships know that, and it's why they're so eager to get you behind the wheel. Another genuine psychological weapon for dealerships is negotiation. With virtually any other consumable product in the world that you purchase, you see a price, decide whether you want it or not, and then you choose how to pay. Car buying is not quite as simple. It basically forces you to become an expert negotiator if you want a good deal.
Let's focus on how dealerships use debt as yet another tool to manipulate you. Seeing a car sticker price can take your breath away. What happens if you can't afford the payment? Well, don't worry. The dealerships will bend over backwards to make the payment more affordable for you. Will they just lower the price or lower the interest rate? Highly doubtful. Most often, they'll simply increase the length of the loan. And this is exactly why 7-year car loans have become so common. Specifically, they represented over 20% of all new auto loans in Q2 of 2025.
There's a reason they say 84 months instead of 7 years. 7 years of life. 84 months. That'll be here in no time. The biggest consequence here is underwater car loans. That's when someone owes more than the car is worth. And Edmonds reported that close to a third of trade-ins toward new vehicle purchases at the end of 2025 had negative equity with the average amount owed on underwater trade-ins hitting an all-time high of over $7,200. You owe 20 grand on a car that is only worth 13 grand. And the sad part is too many people roll that negative equity into another loan, drowning them even further, making it even harder to get out. And by the way, dealerships are making the majority of their money through financing and kickbacks, which is why they don't take too kindly to people like me who pay cash for the car, because their margins are so big. Their financing kickbacks this big.
Car dealerships are expensive middlemen powered by manipulative psychology and highly incentivized to rope you into a payment you can't afford. Which leads to a very important final question. What can we even do about it? Because you shouldn't have to get psychologically waterboarded into an $800 monthly payment just to buy a car these days. You need to get educated. If this is the system we're stuck with, you have to learn how to navigate it and avoid the pitfalls. Study how car negotiation works. Focus on the out-the-door price. Be willing to walk away. Do your research. And most importantly, avoid debt altogether. Financing is the bread and butter of dealerships. When you decide to stay within your budget and buy a car you can actually afford in cash, you don't have to worry about getting swindled or falling into their mind games. And when you buy used, you avoid taking the biggest hit on depreciation, which is that first few years of that new car's life.
Will the dealership try to make your life more difficult if they find out you're buying used and you're not going to finance? Potentially. But in that case, have some walk away power and don't do business with slimy salespeople who try to jack up the price last minute because they find out they're not getting a financing kickback. And plus, when you pay cash, you don't have to deal with monthly payments, interest, or the potential of going upside down on a loan.
