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3 Critical Mistakes Car Buyers Make
What is dealer holdback and how can I use it to my advantage?
Many car buyers don't understand what dealer holdback is, what it is used for and what its role is, if any, in the deal-making process. It is quite the mythical beast, so let's try to clear up some of the confusion.
Dealer holdback is a percentage of either the MSRP or invoice price of a new vehicle (depending on the manufacturer) that is repaid to the dealer by the manufacturer. The holdback is designed to supplement the dealer's cash flow and indirectly reduce "variable sales expenses" (code words for sales commissions) by artificially elevating the dealership's paper cost.
Contrary to what some consumers think, the dealer holdback itself can't really be used as a bargaining chip.
Dealerships must have an inventory on hand so that consumers can browse and ultimately select a vehicle. Dealerships must pay for this inventory when it is obtained from the manufacturer, and the amount it pays is the price reflected on the invoice from the manufacturer to the dealer, the so-called invoice price sometimes referred to as wholesale car price.
Interestingly, with the introduction of dealer holdback some years ago, most manufacturers inflated the invoice or wholesale prices for every vehicle by a predetermined amount (2-3% of MSRP is typical). The dealer pays that inflated amount when it buys the car from the manufacturer. But later, at predetermined times (usually quarterly), the manufacturer reimburses the dealer for that excess amount. This is the dealer holdback, so named because funds are "held back" by the manufacturer and released only some time after the vehicle is invoiced to the dealership.
Why the sleight-of-hand you might ask? Because dealer holdback can benefit dealers in three ways:
Dealerships borrow money to finance cars based on an invoiced amount that includes the dealer holdback. So the higher the invoiced amount, the more the dealership can borrow from its lender.
Inflating the dealership's "cost" can have the effect of increasing profit, since sales personnel are paid commissions based on the "gross profit" of each sale.
Dealer holdback has the effect of lowering the gross profit and thus the sales commissions.
Dealer Holdback enables dealerships to advertise "invoice price", or wholesale car price sales and sell their vehicles at or near invoice and still make hundreds of dollars on the transaction. This dealer holdback amount is "invisible" to the consumer because it does not appear as an itemized fee on the window sticker. For example, let's say you're interested in a Chevrolet with a Manufacturer's Suggested Retail Price (MSRP) of $20,500, including optional equipment and a $500 destination charge. Let's also say that dealer invoice, or wholesale price on this hypothetical Chevy is $18,000. The cost of the car includes a dealer holdback that, in the case of all Chevy vehicles, amounts to 3% of the MSRP, or $600. (Note that the $500 destination charge should not be included when computing the holdback.) So, on this particular Chevy, the true dealer cost is actually $17,400. Even if the dealer sells you the car for the invoice price, which is unlikely, he would still be making as much as $600 on the deal (when his quarterly check from GM arrives).
Almost all dealerships consider this dealer holdback money "sacred" and are unwilling to share any portion of it with the consumer. Don't push the issue. Your best strategy is to avoid mentioning the holdback during negotiations. You have many other areas in which to reduce the price you pay on a new car. You need to pick your battles, and dealer holdback is not a battle worth fighting. Click here to buy a new car at invoice.
3 Critical Mistakes Car Buyers Make
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