What is Dealer Holdback?

Have you ever seen a car ad where a dealer is "giving away" cars at invoice price? You may have wondered how a dealer could sell their cars at invoice and still stay in business.

Well, not only could that dealer stay in business, they were probably making a killing on their vehicles - even when selling them at invoice price.

One reason is due to a payment called holdback, which the dealer receives from the manufacturer for each car they sell. The holdback is paid on a quarterly basis and is usually equal to 1 - 3% of the total price of the vehicles. For example, if a car has an MSRP of $50,000 and there is a holdback of 3%, then the dealer will receive $1,500 from the manufacturer whenever he sells that vehicle.

A dealer could run a highly profitable operation simply off the holdback they receive. Although not all manufacturers offer holdback, most do and here is what each one is estimated to offer:

Note: Direct-to-consumer brands like Tesla, Rivian, and Lucid do not use traditional dealer networks and therefore have no holdback.

When figuring out the holdback for the vehicle of your choice, here is how to calculate it based on the table above:

• Total MSRP: Include MSRP of vehicle including all options
• Base MSRP: Include only the base price of the vehicle NOT INCLUDING the price of any options
• Total Invoice: Include invoice price of vehicle including all options
• Base Invoice: Include only the base invoice price NOT INCLUDING the price of any options

Why is There Such a Thing as Holdback?

The obvious question - why is there even a holdback amount? Manufacturers actually started using holdback over 50 years ago when new car dealers were having problems paying their taxes. They decided to keep a reserve for each car purchased by the dealer and would give them the payments on a quarterly basis - when their taxes were due.

This kept many dealers afloat and the practice continues till this day, although now it's just more of a profit center for dealers rather than a way to avoid tax foreclosure.

Can You Use Holdback in Your Negotiation?

In addition to holdback, there can also be other hidden kickbacks such as advertising credits and other forms of manufacturer incentives. The bottomline: Invoice price is never what a dealer actually pays for their vehicles - there's always going to be a lot of wiggle room for you to work with.