By Suzanne Kane
Buying a new vehicle involves many considerations, some confusing terms and a lot of research. One of the terms that are not well known is “dealer holdback.” What is dealer holdback and why should it matter? Consider the following.
Definition of Dealer Holdback
In simple terms, dealer holdback is a percentage of either the Manufacturer’s Suggested Retail Price (MSRP) or a new vehicle’s invoice price, depending on the manufacturer, that the manufacturer repays to the dealer.
What it’s intended to do
Dealer holdback has the intent to add to the dealer’s cash flow and/or to reduce sales commissions by an artificial elevation of the dealer’s paper cost.
How holdbacks work
Dealers have to have inventory on their lots in order to have vehicles for customers to see, touch and test-drive prior to purchase. If this inventory comes from the manufacturer, the dealer has to first pay the manufacturer for it. The amount the dealer pays is the amount on the invoice from the manufacturer called the invoice price.
Holdbacks are calculated by the manufacturer (typically 2 to 3 percent of MSRP) and added to the invoice. After the dealer pays the manufacturer for the vehicle, the manufacturer repays the dealer for that holdback, sometimes on a quarterly basis. On a $30,000 MSRP vehicle at a holdback rate of 3 percent, that’s $900 – a pretty tidy sum that goes back to the dealer.
How holdbacks benefit the dealer
The dealer has the ability to borrow money to finance cars that is based on the invoice amount of the vehicles (and includes the holdback). Holdbacks lower gross profit and sales commissions (which are paid based on gross profit per sale), through inflating the dealer’s cost. Holdbacks give the dealer the opportunity to advertise it sells vehicles for $1 under/over invoice and still make several hundreds of dollars on the transaction (the amount of the holdback).
Holdbacks are something to keep mum about…
Dealers are sensitive to any discussion of holdbacks, considering them a “sacred cow.” Don’t get into a discussion about holdbacks with the dealer unless you feel that, after good faith negotiation, the dealer is taking you for a ride. If you mention you know they’re making money on the holdback right at the outset, you’ll pretty much kill any negotiating room you have.
A better strategy might be: Know how much the dealer invoice is and try to calculate the amount of the holdback. Then offer the dealer a couple of hundred over the invoice price. This may be attractive enough to the dealer (he’ll be selling the vehicle) that he’ll agree to your offer. It’s certainly worth keeping in mind as you look at that new vehicle you’re hot to buy. Just remember not to show that you’re too eager… You always have to be ready and willing to walk away. Sometimes that’s when the real deals start.
Extensive information about dealer holdbacks can be found by visiting Edmund’s website at http://www.edmunds.com/advice/incentives/holdback/index.html.
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