I’ll try to be as brief as I can and still make sense to you.

Many potential car buyers have either never heard of or only vaguely remember hearing something about dealer holdback when it comes to purchasing a new car. And even fewer understand the nature of dealer holdback.

O.K. I’ll take my whack at explaining this to you.

Dealer holdback is either a percentage of the MSRP or the invoice price of a new car (which one depends upon the manufacturer) that is repaid to the dealer by said manufacturer… O.K. so far?

This ‘holdback’ is used to puff up the dealer’s cash flow as they sell the cars. It is also very valuable to the dealer, as this holdback money helps defray the cost the dealer pays in commission to the sales staff. This is accomplished by artificially inflating the dealers cost (at least on paper).

Some car buyers believe this dealership sacred cow can be used as part of the negotiations during the buying process. I don’t know that to ever be true, but certainly knowing about dealer holdback can help you get a better deal.

Let’s take a look at the mechanics (no pun intended) of holdback between the dealership and the manufacturer.

Dealers must pay for their inventory as they obtain it from the manufacturer. However with holdback, the dealership pays an inflated invoice price that includes said dealer holdback.

This is usually a predetermined amount (2% to 3% is fairly typical). So, the dealer pays this inflated amount when they by the car. But, later at a predetermined time, the manufacturer will reimburse the dealer this amount as the inventory is sold. Thus the name ‘holdback’ is born because this money is held back from the dealer until the inventory is sold.

What? You ask.

Why such a convoluted process!

Good question.

Here’s why.

Dealerships borrow money to buy their cars. So, with what amounts to an artificial invoice, the dealer can borrow more money.

Inflating the dealers ‘cost’ has an effect of increasing the profit.

Huh???

Higher costs increase profit? How so???

Because the sales staff are paid on the gross profit of each sale, and the higher the invoice price the lower the gross profit… the less commission you have to pay. Still not clear?

How about some quick theoretical numbers for you.

MSRP: $20,000

Holdback: $400.00

Inflated Dealer Invoice: $18,000

You the sales person sell this car for said MSRP. So, the gross profit on the sale is $2,000 which is what you get commissioned on.

The dealer is actually going to get that $400.00 back from the manufacturer but you don’t get paid commission on the ‘net gross profit’ which in affect would be $2,400.

So by increasing the dealer cost… it actually boosts profits by lowering the commission expenses incurred by the dealer.

By now you can see how car dealers can play these annoying radio spots screaming at you about selling you their cars this weekend at ‘dealer invoice’ price.

They really don’t.

Besides, think about it. No business is going to sell their product for what it cost them to buy it. No business that is going to pay it’s employees, its rent, etc and stay in business… I mean c’mon let’s not insult our intelligence here.

And finally think about the immense amount of holdback money the manufacturer’s have in their possession at all times! Just on the simple interest they’d make on holdback is staggering!

The dealer holdback dollars are invisible to the perspective buyer as it will not appear on any sticker or paperwork on the vehicle.

You won’t be able to use holdback as a source of bargaining power but, it shouldn’t deter you from working the deal as hard as you can.

You should only bring up holdback if the dealer starts ‘crying’ about how they aren’t making any money on your deal… they’ll get their holdback, back.

Closing the deal next….

That type of marketing business model has proved there are many people that are willing to settle for the sticker price of the car as a trade off for a low pressure sales approach by the dealer, and without all of the heavy negotiating.

This is O.K. for those people and I can assure you, it is great for the dealer!

In fact, if you accept the premise of a fixed selling price for the new car, you are pretty much making for a happy dealer.

The car business is what it is.

There are a lot of numbers being move around during the course of the deal. The manufacturer offers dealers various forms of financial incentives in order to enable the dealer to move their inventory, so if you simply accept the sticker price as a fair price, one not needed to be negotiated upon, then you will pay more than you need to.

What about your car trade in? Are you just going to assume that since you can’t negotiate the price of the new car, then you must accept the number they put on your trade?

I hope not. Especially since you’ve come this far!

Even a dealership such as Saturn has to move their inventory… period. Exclamation point!

I know this for a fact. I case you missed it on the home page, I worked this business for many years… Saturn included. And although Saturn may not ostensibly come off the sticker price of their new car, there are other ways to move the numbers to get you to the price you want if you are persistent in your negotiations.

And if your off to visit a ‘no haggle dealer’, you should still take the time to do your homework. Again, no haggle dealers still get incentives, rebates, and other manufacturer financial biscuits. And, do you remember the holdback they get?

Also, no haggle dealers aren’t immune to putting those nasty dealer $add-on$ stickers on the windows of their cars… don’t pay for this stuff.

Next… never a monthly payment approach… never

The following may seem a bit confusing, and it pertains to the used car buying experience, but if at first you don’t quite get what’s going down… re-read it.

This is an extremely important lesson to learn.

It takes a bit of time to run through this and explain it, but it is very important so take your time.

Believe me, you’d better learn it here and not on a some car lot somewhere! This lesson is a bit long, but please stay with it.

With the dealer knowing that they have $11,000 to work with on this car that you want, and that has only cost them $7,000; they can price this car from the bottom up to make sure they get all of your $11,000 and make a very nice profit. In other words, they are going to determine the bottom line first which is your $11,000!

Then they’ll figure out the math from the bottom back up to the top or the selling price that they will quote you!

Watch how this works.

In the sales manager’s office they will start with your $11,000 (which is the bottom line they have to hit) and work their way back up to the selling price.

Wow! Imagine that!

We just made it under your $11,000 loan approval and on the car you wanted so badly!

Today is your lucky day!

Remember the dealer only paid $7000.00 for the car so their profit on the front end of this deal is a tidy (very, very tidy) $3,279.00.

Gulp!

And you haven’t even been to the finance office where they’ll probably make even more money on the interest rate they offer up to you!

Now, let’s say you have been to this website and you come to this car dealer completely prepared when you look at this car.

You demand to know right up front what the asking price of the car is because you can’t immediately tell from any information posted on the car.

Note the sales person knows nothing of your credit and ESPECIALLY the dollar amount you have been approved for, because you haven’t offered that up.

Now the sales person has to give you a realistic starting price from which to work. Let’s say they quote you $8,999.00 (because that really is what they had the car priced at).

And just like that…You are already starting the negotiations ONE THOUSAND DOLLARS under the previous scenario’s price of $9,999.00!!!

But wait! Because you have checked on the average retail prices for this make and model of car at Edmunds.com you know that a fair retail price for this car is about $7,800.00 to $8,200.

You negotiate hard and stand firm and finally arrive a price of $8,000.00. Let’s compare your numbers for the front end of these two deals.

On the second buyer (note they didn’t want the pinstripes and after some tough negotiating got the dealer to drop their administration fee), the dealer still makes a $1,000 profit on the vehicle, but look at the money you as an informed buyer have saved!

And again, this is only on the front end of the deal! Let’s carry this scenario out just a bit further and take a look how this affects your overall cost of financing your car.

Wrapping it all up: but we’re not quite done.

Let’s say that poor first buyer (not you) went for a 60 month loan at 12% interest rate that the F&I department of the dealership was so kind to get them.

This first buyer will end up forking out about $14,679.60 over the length of the loan.

However, our second buyer did their leg work and got their car loan financed at a 10.5% interest rate. The second buyer will pay only about 11,038.20 for the life of the loan.

A difference of $3,642.00!!!

And if the second buyer really rolled up their sleeves and told the dealer no thanks to their financing offer… the dealer may have been able to beat the second buyer’s bird in the hand interest rate of 10.5% and saved even more money!

And… there always an ‘and’… aside from the additional financial burden the first buyer will have to bear, buyer number one will never be in a position to trade out of this car much of anytime before the full length of the loan. In car business lingo, buyer one is buried in that car!

Buyer two is on their way to improving their credit score and will be in a position to potentially trade out of this car much, much sooner.

Great job!

This was a longer lesson but I think you’ll find it well worth the information.

Let’s talk some more on car deal negotiating next…

How is my credit part of a car dealer’s sales tactic?

You may run into a car dealer or salesperson that indicates to you that you won’t or can’t qualify for competitive finance rates, but “our finance manager is one of the best in the business and because of the volume of business we do with Acme bank and trust we will work on your behalf to get this deal done for you.”

The finance department for a car dealership can be a huge profit center for a dealership. In fact, as we have discussed before, the finance manager is every bit a sales department within a dealership.

Finance managers make money off of your deal buy getting the money at a lower rate than which they sign you up for.

For example if the finance department gets the money from their favorite bank at say 8% and you sign the financing papers at 9.5% (or higher) the dealership is very happy for you.

This is why is it so very important that you know your credit.

Let me repeat that… know your credit.

So take some time now and go to Equifax and find out your credit score.

When you know your credit score you can’t be misled. If you have had some credit problems in the past this even becomes more important. And while we’re at it, take the time to get your car financing ducks in order at GreatCarRates.com or Automotive.com at any of these sites the application process is easy and you’ll know something back in short order. Knowing your financing before you go car shopping is powerful stuff.

Let me give you an extreme example yet a very real example of how your lack of understanding can bury you in your car and financially. This can happen during a car sale because you have to have transportation and you have misplaced your trust in car dealership and salesperson by telling them about your credit and your financing.

Let’s say a dealer has a car on their lot that they have put $7000 into. You don’t know what the asking price for this car is because it is not readily available to see anywhere on the car. Many dealers use a code for the price in the stock number of the car so the salesperson can recognize the price but not you.

Now let’s say you really like this car and want to try to buy it. Moving forward just a bit for the sake of the example, let’s say that either through the dealer financing or by virtue of the fact that you’ve told the sales person how much money you have been approved for (A REALLY BAD mistake either way) the dealer now knows that a bank will loan you $11,000 on an approved vehicle (hold onto your wallet)!

Knowing just this little bit of information on you and relying on the fact that you aren’t a polished car buyer or shopper is a gold mine for a salesperson and car dealer, and this is potentially what the dealer can do for … err uh… or more truthfully TO you.

Let the blood letting begin oh poor uninformed car buyer with not so good credit!

Next I’m going to show you something that may startle you just a bit when it comes to the used car side of the car buying experience… hold on to your wallet next up is Car Dealers – Tricks And Sales Tactics part 3 chaaaaaa chiiiiiing.

Well… no not all car salespeople. Most are just trying to make an honest dollar. But keep in mind a couple of very important points.

First, salespeople and in particular car sales people have aggressive personalities. They’re competitive.

Very competitive.

Secondly, even the one’s that are trying to make an honest dollar are certainly trying to maximize the number of honest dollars they make.

As a car salesperson your sales numbers are always put in front of your face by management, but they are on public display in the salesroom for all other sales people to see. And if those numbers aren’t up to dealership desires, you won’t continue to be employed. The point is for someone trying to make a living and take care of their family, the pressure to sell is very real.

So, what sales tools and tricks are you likely to run into when you’re out car shopping, and how do you effectively combat them?

First of all, if you’ve cruised around this website you know that research and self education is your primary defense. In today’s internet world there is really no excuse to be uneducated.

So, do your legwork online with someone as good as Edmunds.com. Edmunds will break everything down for you and give you no nonsense information.

Remember knowledge is power for you the consumer. And with research and self education you not only gain confidence in your ability to negotiate a car deal, but you are also aware of and prepared for the various sales tactics and tricks that you may be tested with when you are out buying yourself a car.

With this in mind, in the next couple of articles I’ll give you some valuable information on some of the car dealer sales tactics and tricks that you may be the recipient and how you can avoid making a costly mistake.

So, let’s get started!

Next Car Dealers – Tricks And Sales Tactics on your credit history part 2

The process will generally begin with you being asked how much you are planning on for a monthly payment. Or, what type of monthly payment range are you looking to achieve.

The operative sales set up word here is ‘range’. Of course, if you have spent some time on this website then you already know what your monthly payment will be based upon, what you intend to finance, and for how long.

You also know that your budget and the monthly payment you can afford are on a need to know basis and the car salesman doesn’t need to know.

But anyway, let’s get back to the 4-square and the monthly payment box. If the salesperson is truly following the sales model, after they ask you what you want your monthly payment to be, and you say “$300″, they might just respond with “up to…?”

Now this is very significant because right out of the gate what they are trying to bump your monthly payment expectations (increase gross profit and commission). And if you say (just like a big ol’ fish) “oh, up to about $350″ just watch the car salesman write $350 in that square!

Remember it’s all about maximizing that profit. You should see what they do when they say “that’s great… $300… up to?”… and you respond with “oh about $250.” And do so with a very serious straight face. In other words… stop trying to bump me up the ladder.

And don’t be surprised if this “up to” approach is also used when the salesperson begins talking to you about how much money down you plan to put on your new car purchase.

At this point you may be thinking ‘how can this possibly work?’ Believe me it does. This 4-square approach has withstood the test of time. So, if it wasn’t working and working well, car dealers that do use it wouldn’t be using it.

O.K. The final box (or at least as presented here) on the worksheet is reserved for your trade-in allowance. The area of the trade-in is where the most profit can be made.

Buyers can sometimes be so fed up with their old car that they can’t wait to say good bye to it and they don’t do the research on the value of their trade-in. Believe me, the used car manager is well aware of it.

Next 4 square and desking the deal…

It is the latter, and one tactic specifically I would like to address in these articles for you.

In the car business, many car dealerships and subsequent car sales people use what is known as a work sheet when they are dealing with a potential automobile buying prospect (you).

Of course, any type of sales is predicated upon using a tried and true system, presentation, or process that works. Everything sales has one. In the car business their is a sales process that may car sales people on trained on known as the the 4-square worksheet, 4-corner close or some other connotation thereof.

The 4-square worksheet or the 4-corner close is drilled into the automobile salesperson that this tool is their ally. This tool will maximize their profit and as such maximize their commission. And you should be aware of this when you sit down to negotiate the car deal.

As the name implies, the worksheet is divided into 4 sections.

So, when the salesperson gets you to sit down in their cube (known in the business as having the customer in the box… isn’t that comforting), don’t be surprised to see the arrival of this sales tool.
compare car pricing

First of all, I should point out that at some car dealerships, the salesperson is absolutely required to work the deal following this worksheet to a tee. And believe me, many dealerships put the fear of the salesman’s job into the salesperson’s mind if they don’t.

Many sales managers won’t even entertain the offer and run the sales person out of their office and back to the customer to get the proper information if they haven’t followed the 4-square car deal worksheet.

With the 4-square work sheet the customer information is at the top along with the basic information on the car you have selected. Then (usually in the upper right square) the sticker price of the car is written in a authoritative fashion. The other boxes on the worksheet are for the price offered for the trade-in, the amount of your down payment, and your monthly payment.

Coming up next we’ll take a look at the process behind the 4-square worksheet and how you should deal with this during the automobile buying process.

Next more on 4 square hell...

This isn’t just in the case of the car salesman. It’s true of all sales.

This isn’t a derogatory observation. It is what any salesperson must do to be successful.

The salesperson must be able to think and converse on their feet. Successful selling takes positive energy between the customer and the sales person. It not a good sales tactic to let the conversation stall or begin talking about negatives.

Again, the purpose of a salesperson and how they ultimately make their living is to sell you something; to continually move you mentally toward making a purchase.

So, while you’re out car shopping don’t be surprised if you a few lines:

	“I can only hold this price for you today.” A legitimate price should be good today tomorrow or next week. However, be fair. If this statement comes after a good bit of honest hard negotiating on yours and the dealer’s part, I feel that this is only fair. Don’t take everyone’s time and effort in working to put a deal together for you, and then expect them to leave it on the table while you may or may not come back next week. “How much were you thinking about spending for the car?” Pass. No need for the sales person to know this. It’s only fair then… ask the salesman what the net/net dealer cost is on this car. Besides, you have done all your research… you know all the numbers involved. “You wouldn’t let $10 a month keep you from your car would you?” Always one of my favorites. Pose the same question back to the salesperson (you wouldn’t let $10 a month stop this deal would you). It’s your money and their commission they won’t be getting. After all $10 a month on 60 month financing is easy to figure out… $600 PLUS the interest charged on this $600. “If you’re comfortable with the payment range, then the interest rate must be O.K. too…” “I’m not really interested in ‘payment ranges’ and I do want to know the precise interest rate you’re quoting on this deal.” “What would you consider a fair profit?” “Whatever the profit turns out to be on the offer I just gave you.” “Shop around, and come back and I’ll beat any offer.” Of course they will. Who wouldn’t once they know the number to beat. But insist on a firm offer from them. A copy of the buyers order will do (It’ll drive most sales manager nuts if you leave with a copy of the buyers order) . “The pricing information you have isn’t correct.” O.K… let me see yours… you know the one that even has the holdback numbers on it.” “You said you want your payments to be $300… up to…..?” This is classic car sales verbiage … and it’s crap. By now you should be saying “wait a minute. I don’t negotiate based on a monthly payment. And the monthly payment I’m comfortable with is for me to know not the dealer. Also, this begins the process of teeing up the deal for the finance department. You know better than to go down this path. But if you find yourself somehow up against this question say… “Up to about $250!” and see how they react. “You’re planning on putting how much down?” Again, for you to know only. Work the deal based on the selling price. Don’t offer any type of down payment up at this point. You can certainly decide upon that later. If you trip up and mention how much you plan on putting down… be ready for the “and up to” comeback as mentioned just before this.

Don’t let the salesperson ‘oh by the way’ extra cost you on the vehicle. Sometimes letting you know that this car already has had fabric treatment applied, paint sealant, some sort of undercoating, pin stripes, glass etching, etc. All of these add no value and are big profit items for the dealer. And they don’t need to be part of the selling price of the car.

Don’t let the sales person bump you up in your price a few dollars here and there. Stay firm and focused. Be very wary of something that is ‘only going to add a dollar or two, to your monthly payments.

Through it all ask many questions if you feel confused. Get up and take a break and walk around if need be. Remain confident in your research and ability to negotiate.

Even though the negotiating process may take a while, if you felt as though the salespeople have dealt with you in a straightforward manner and worked hard to put the deal together, then by all means get the car you’re after.

The dealer will make some profit any business will and should. Profit is a function of staying in business and making a living for you and your employees. Any business has to.

No dealer is going to sell you a car for $20,000 if it cost them $21,500, and you shouldn’t expect them to. If you have had a tough but good experience then buy the car… it’s a win/win and you can develop a good relationship with the dealership.

The last couple of cars that my wife and I bought were a tale of two trips to the dealership. The first time in we were looking at a new car. And it was the first time my wife had the pleasure (tongue firmly in cheek) of being with me on a car buying day.

A really long story (and day) short.

When we left that day after signing all the paperwork, my wife said to me…. my goodness, I would have paid way tooooo much for this car. I said, “Believe me… I know.”

I think our salesman that day was as tired as my wife… but it was a good day. I kidded the salesman and said my car is getting a bit long in the tooth, so I’ll be back in a few months to buy a used car from you. He laughed and said “thanks for the warning!”

Fast forward a few months…. I’m back. I look Joe up and we go straight to his office where I told him the used vehicle that I was looking at, the price I would pay for it, and what I wanted for my trade.

Joe looks at me with a grin and says, “should I even have my used car manager drive the trade”…. “can if you want, Joe… it won’t change my offer.”…. He didn’t… they knew me.. we did the deal… out of the dealership in about an hour with the numbers I went in with.

Did the dealership lose money… no. I didn’t expect them to.

Did they make big money… no.

Did both parties win… yes.

I bought car number two from them, and they and Joe made some money and moved some inventory; which is a very good thing.

I stopped by the dealership not too long ago to hi to Joe and pull his chain a bit…. Joe had retired….

hmmmm maybe I should re-think that last deal I got!!!

Some car sales tactics next…

In fact, it can help keep your head on your shoulders and your money in your pocket throughout the steps in buying a car.

Also by understanding the perspective of the salesperson and the dealership, you will know what to expect, and how to answer the various leading questions they will toss out at you throughout the car buying process.

This will give you much more confidence in the negotiation stages of the car deal.

So, let’s take a look at both sides of the fence.

First, let’s look at the advantages the car dealer has over the potential buyer.

• The vehicle sales person will more than likely be the first contact you make.
• Keep in mind automobile sales people know their business. They know the market. They know the product line, and all the options. And they are trained to sell.
• They are in ‘sales mode’ everyday.
• Selling vehicles is what they do for a living. They are trained to understand your needs. They are trained in getting reluctant car buyers to the sales office. They are experts in making transactions happen.
• The sales people relatively speaking have little to lose in comparison to you the buyer who is contemplating a large ticket purchase.
• Many of you, unfortunately are unprepared while the sales person is trained to handle and overcome any objections you may have in route to the sale.
• Sales people are on their home turf.
• This is a road game for the car buyer. The sales people are comfortable with their surroundings at the automobile dealership. While you probably won’t be.
• People on their own turf generally exhibit more confidence and act a bit more aggressively as such.
• Sales people have other trained professionals to come off the bench and help them close the deal.
• Yes, there are even other people at the car dealership more than willing to take a crack at you. This is known as a ‘T.O.’ (turn-over). The sales persons turns the potential car buyer (you) over to generally a manager sort.
• This generally happens when the sales person feels a new face or angle could help close the deal, or when you are about to walk. And you can bet that these people will not only be fresher, but even stronger with their techniques.
• Managers generally want the opportunity to talk with you before you exit just to make sure there isn’t an uncovered objection that you have that may have gone unaddressed. It’s good sales practice.
• The sales people can claim limited authority.
• This is a standard tactic. The sales person is ‘on your side’ and when the questions from you get too tough nothing will get approved until a sales manager does so.
• So, if you feel they are backpedaling from previous statements it may because the manager has vetoed their action.
• The system has been set up and is tried and true to give the salesperson the best possible advantage in order to sell the car.
• That’s right the automobile industry has refined a system and approach through the years to work effectively when it comes to separating you from your money. A tried and true system indeed….. it has been used by dealerships for decades.
• The dealer may have the exact car you are looking for, so you may be tempted to just jump right in.
• Like many people you may have waited to trade the old car in until you just can’t stand to ride in it anymore! This makes it difficult for you to walk away from the deal even when you know you should.
• If this is the situation you have put yourself in, you for sure have weakened your resolve and bargaining power.

Ok….. so it’s an impressive list of advantages…. so what are you to do????

Drop to the floor and assume the fetal position?

Well, in so many words and by so many actions, many people do. But of course you’re not! You’ve been perusing this incredibly helpful website!

Next Car Buyer Help – Buyer Advantages

not just what the dealer paid for the car.

Two very different amounts, I assure you.

This knowledge will certainly strengthen your position when it comes to making offers and counter offers throughout the new car deal process and also a starting point from which to present your offer to the dealer.

Knowledge definitely worth the time and effort.

Cash back, incentives, rebates have become just as much a part of the deal as the car itself… maybe more.

Manufacturers and dealers will be even more creative in their marketing by offering ‘special financing‘ and your choice between cash back and special discount pricing and financing. These programs are beneficial to you the buyer. If you know about them. And, at least ostensibly, not designed to deceive you.

It’s simple competition for your dollar.

Having said this, you should also keep in mind when it comes to marketing techniques such as special low interest financing, the dealership is simply taking the rebates from the manufacturer and giving to the finance company in what is commonly called ‘buying down the interest rate’.

Yes, it’s true that this may very well could have been money back to you, but using to buy down your finance rate isn’t all that bad.

The point here is that the dealer isn’t that magnanimous with his own money. It was probably yours in the form of a rebate.

From a marketing perspective, factory rebates open up a whole new arena of creative marketing ploys. Don’t necessarily rely on the salesperson or the dealer to offer up this money and automatically put it on the table… you need to know this… remember.

Also, a great rebate offered and car dealer incentives shouldn’t be the sole reason you go after a particular car.

A great rebate attached to a poor deal is still of bad value to you.

Some tips on finding the right car next…