Dealer holdback is almost a subject in and of itself.
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….
