The Expert Podcast

How does vehicle dealership floor planning affect auto sales and consumers?

Let's first talk about what a floor plan is. A floor plan is a specific line of credit that a car dealership gets to finance its inventory. Most dealerships have floor plan financing in place for their car lot. For example, if you drive by a typical new or used car dealership and see 100 cars parked on the lot—or even just 50 cars—at an average price of $20,000 to $30,000 per car, that’s millions of dollars worth of inventory just sitting there.

Most dealerships don’t have millions of dollars in cash readily available to invest in inventory. Instead, they use a credit line, similar to a large credit card, to purchase vehicles. When dealerships go to auctions to buy inventory—where most dealerships source their cars—the auction is connected to their floor plan. When they purchase a car, they simply sign for it, and the cost goes on their line of credit.

For instance, if a dealership buys a car for $25,000, the line of credit transfers that amount to the auction. The dealership then takes the car back to its lot, prepares it for sale, and lists it. When the dealership sells the car, it must first pay off the $25,000 from the sale to clear the debt. If they sell it for $28,000, they use the first $25,000 to pay off the floor plan, keeping the remaining $3,000 as profit—minus costs for shipping, auction fees, or reconditioning.

However, what happens if a dealership starts running low on cash? They may struggle to cover rent, payroll, or other expenses. When they sell a $25,000 car, it can be tempting to use that cash to cover immediate costs instead of paying off the floor plan loan. While they can delay the payment temporarily, this creates a major issue—the title for the vehicle remains with the floor plan lender until the loan is repaid. Without the title, the dealership cannot complete the title transfer, registration, or license plate process for the customer. The buyer may unknowingly be left in limbo while the dealership tries to juggle finances. This can quickly turn into a cycle similar to a Ponzi scheme.

Another issue is the rising cost of floor plan financing. A few years ago, interest rates were low—around 1% or 2%—costing only a couple hundred dollars per month to keep a car on the lot. But with today’s higher interest rates, it might now cost $500 or $600 per month. If a car that once sold in two weeks now sits for three months, that’s an extra $2,000 in interest. Adding that to the original $25,000 purchase price, the dealership now has $27,000 tied up in that car.

If the market drops and a buyer offers $23,000 for the car, the dealership faces a dilemma. Accepting the offer would mean taking a $4,000 loss since they owe $27,000 on the vehicle. If they don’t have enough cash to cover the difference, they may be forced to hold onto the car, even though its value continues to drop and more interest accrues each month.

Consumers often wonder why dealerships don’t just lower prices and sell cars quickly. The reality is that many dealerships physically cannot sell at a loss because they don’t have the cash to cover the difference. They might be in negative equity or underwater on the car. This problem is even worse for luxury dealerships. If a dealership sells high-end cars priced at $40,000 to $50,000, they could have $8,000 to $9,000 in negative equity per vehicle if the market shifts.

This situation impacts consumers in several ways. First, it could delay the title transfer when purchasing a car. Second, it could make it harder to find fair prices, as dealerships may resist lowering prices even when market values decline. Third, it affects trade-ins. When a customer trades in a car with an outstanding loan, the dealership is responsible for paying off that loan. If the dealership has financial trouble, they might delay or fail to pay off the trade-in loan. In some cases, dealerships have made loan payments for customers instead of paying off the loan in full, hoping to buy time. If they fail to make payments, the customer faces late fees, damage to their credit, or even a situation where the dealership goes out of business, leaving them with an unpaid loan.

The floor plan financing issue is currently impacting the car market. Many cars sit at auctions for weeks or even months as their book values continue to decline. Dealerships are often stuck with these cars, unable to sell them without taking large financial losses. This is why some vehicles remain on dealer lots much longer than expected—it’s not always about unwillingness to sell, but rather an issue of financial survival.