Dealer
Holdback
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.
- Get Free price quotes and vehicle information.
- Get multiple local dealer
selling prices!
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