What is Holdback?
So you've heard about this elusive term, "holdback," from your friends that know all about
buying cars. You want to have access to the same information they do,
get an edge on purchasing your next car.
Well, for starters,
dealer holdback is only one component of the
car
buying experience. But it's always good to get your facts straight, even if this is only
one piece of your
car buying strategy.
Dealer holdback works like this. The car manufacturer pads the MSRP
(manufacturer's suggested retail price) or invoice price when selling a vehicle to the
dealer. Usually, the manufacturer will add on 2% to 3% to the cost of the car.
So for a $25,000 vehicle, if a holdback fee has been included, there could be $500-$750 added on to
the overall price. At a regular interval, the manufacturer will reimburse the
car
dealer for the holdback fee.
So, you're telling me, the manufacturer inflates the price of the car, sells the car to the
dealer, holds back the necessary funds to later reimburse the
dealer and then pays the
dealer the holdback amount some time
after the
dealer pays off the car (usually quarterly)? Yes. But why, you ask?
Why Use Holdback?
It's all about how the financing looks on the books. The holdback fee helps the
dealer with inventory by increasing the amount of each car on the lot, thus
providing the
dealer with more cash flow. If a car costs more, the
dealer can borrow more from the manufacturer (
dealer's need to
finance their cars too), increase total inventory and hopefully sell more cars. The holdback
also helps the
dealer with sales commissions. Commissions are based on selling
price minus the holdback fee. So, the
dealer has working capital to borrow more
and earn more (even when selling vehicles at invoice price). Holdback fees may also help the
dealer with advertising costs when it comes time for reimbursement from the
manufacturer.
Can Holdback Help Me?
So, how does this help you? Will you see any of the holdback fee during your
negotiations? Maybe. Maybe not. A
dealer is not going to enjoy
sharing profits with you. But if you know about holdback, you can also let the
dealer know you know that invoice minus holdback is their dead cost of the car.
You can offer the
dealer something small over their dead cost. Worst case scenario,
the
dealer sells you the car you want at invoice, which still gives the
dealer a small profit. Best case scenario, the
dealer will dip
into some of the holdback to sell you a car under invoice. You want to
negotiate buying a
car for the best price possible and knowing that the
dealer has the
capacity to make money on the deal with the holdback fee helps.
Also, don't let a sales person tell you they aren't going to make any money when the holdback
can provide a built-in process for them to do so. Some dealers are now paying their sales force
commissions that include the holdback fee. As well, if the car is sold based upon dipping into the
holdback fee, a sales person will usually get a small flat commission of $100.
Along with using all of the other
new car buying tips you learn here,
knowledge of
dealer holdback gives you the incentive to compare prices and bargain
shop for the car you want at the price you are willing to pay. Check out
Edmunds.com for
holdback percentages by automaker. When you're ready to buy, visit these sites to get the best
financing deals:
