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Dealer Holdbacks

Many car buyers don't understand what the dealer holdback is, what it is used for and what its role is, if any, in the deal-making process. 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 holdback itself can't really be used as a bargaining chip. However, knowing about it might help you get a better deal on a new car. How? Well, first here's a little background:

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."

Now the twist: with the introduction of holdbacks some years ago, most manufacturers inflated the invoice 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 "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 holdbacks can benefit dealers in three ways:

1. Dealerships borrow money to finance cars based on an invoiced amount that includes the holdback. So the higher the invoiced amount, the more the dealership can borrow from its lender.

2. 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. Holdbacks have the effect of lowering the gross profit and thus the sales commissions.

3. Holdbacks enable dealerships to advertise "invoice price" sales and sell their vehicles at or near invoice and still make hundreds of dollars on the transaction.

This 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 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).

Dealer holdback allows dealers to advertise attractive sales. Often, ads promise that your new car will cost you just "$1 over/under invoice!"

Almost all dealerships consider 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. Mention holdback only if the dealer gives you some song-and-dance about not making any money on the proposed deal when you know that isn't true.

However, there are many other holdback-types of dealer credits, such as flooring assistance, wholesale credits, advertising credits, etc. In addition, the dealer stands to reap further benefits if there is "dealer cash" being offered by the manufacturer on the car you are considering. In many instances you can learn about dealer cash in our Incentives and Rebates section. However, unless you know all of these other fees (and who does?), establishing the dealer's true cost can be frustratingly elusive. It's for this reason that Edmunds.com has established True Market Value pricing that accurately reflects "what others are paying" by taking into account all of these fees. The Edmunds.com True Market Value Price is the "bottom line" and what you really need to know in order to negotiate a fair deal. Check it out at: http://www.edmunds.com/tmv/new/.

In summary, holdback is nice to know, but is just one small piece of a complex puzzle.

Domestic manufacturers (Ford, General Motors and the Chrysler half of DaimlerChrysler) generally offer dealers a holdback equaling 3% of the total sticker price ( MSRP) of the car. Foreign manufacturers (Honda, Toyota, Volkswagen etc.) provide varying holdback amounts that are equal to a percentage of total MSRP, base MSRP, total invoice or base invoice, as indicated in the list below.

Make Holdback
Acura 3% of the Base MSRP
Audi No holdback
BMW No holdback
Buick 3% of the Total MSRP
Cadillac 3% of the Total MSRP
Chevrolet 3% of the Total MSRP
Chrysler 3% of the Total MSRP
Dodge 3% of the Total MSRP
Ford 3% of the Total MSRP
GMC 3% of the Total MSRP
Honda 3% of the Base MSRP
HUMMER 3% of the Total MSRP
Hyundai 2% of the Total Invoice
Infiniti 1% of the Base MSRP
Isuzu 3% of the Total MSRP
Jaguar No Holdback
Jeep 3% of the Total MSRP
Kia 3% of the Base Invoice
Land Rover No Holdback
Lexus 2% of the Base MSRP
Lincoln 2% of the Total MSRP
Mazda 2% of the Base MSRP
Mercedes-Benz 3% of the Total MSRP
Mercury 3% of the Total MSRP
MINI No Holdback
Mitsubishi 2% of the Base MSRP
Nissan 2% of the Total Invoice
Pontiac 3% of the Total MSRP
Porsche No Holdback
Saab 2.2% of the Base MSRP
Saturn 3% of the Total MSRP
Scion No Holdback
Subaru 3% of the Total MSRP (Amount may differ in Northeastern U.S.)
Suzuki 3% of the Base MSRP
Toyota 2% of the Base MSRP (Amount may differ in Southern U.S.)
Volkswagen 2% of the Base MSRP
Volvo 1% of the Base MSRP

When calculating holdback, use the following guidelines.

If a holdback is calculated from the:

* Total MSRP: consumers must include the MSRP price of all options before figuring the holdback.
* Base MSRP: consumers must figure the holdback before adding desired options.
* Total Invoice: consumers must include the invoice price of all options before figuring the holdback.
* Base Invoice: consumers must figure the holdback before adding desired options.

http://cnn.edmunds.com/advice/incent...ack/index.html

JDM

If I invested 17,000 dollars, I would sure want a bigger return than $600. If I was a dealer, I'd be insulted by someone pounding me for every cent they could get off the price. When I deal, I offer what I feel is fair profit and usually have no problem buying the car. Buyers can be as greedy as they say the dealers are. I remember when edmunds first came out, I was selling cars then. Most of what was said then, dont know about now, was really bad for our business, and way off from reality, at least in our neighborhood. Made things worse for everybody.

ClayJ

It is my understanding that new factory MBZ's sold at dealerships in the USA do indeed have a holdback....

MagicO309D

The concept of Holdback was introduced to keep dealers from dumping cars below invoice. Dumping cars below invoice became a practice when dealers were forced to accept several slow moving models with each order for a faster selling model. Dealers hoped that they would make up the lost profit with the inflated sales price of the "hot" car. The purpose was to protect the value of the manufacturer's slow moving products. Now it basically protects dealers from making a bad deal.

The best way to buy a car remains to know exactly what you want and then shop/call around. KKB.com is great but if you can get a few dealers to bid for your business you'll be golden even when buying a "hot" new car.

In my case, I'll do this and then buy from my town's local dealer. For some reason, it makes me feel good despite the extra $5 to $10 a month.

Musikmann

Thanks to everyone who shined some light on this "secret" issue.
M