The Hidden Profit Dealers Don't Want You to Know: Holdback
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 $25,000 and there is a holdback of 3%, then the dealer will receive $750 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 currently offers:
|Acura||2% of the Base MSRP|
|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||2% of the Base MSRP|
|Hyundai||3% of the Total MSRP|
|Infiniti||1.5% of the Base MSRP|
|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||1% of the Base MSRP|
|Mercedes-Benz||3% of the Total MSRP|
|Mercury||3% of the Total MSRP|
|Mitsubishi||2% of the Base MSRP|
|Nissan||2.8% of the Total Invoice|
|Saab||2.2% of the Base MSRP|
|Subaru||2% of the Total MSRP|
|Suzuki||3% of the Base MSRP|
|Toyota||2% of the Base MSRP|
|Volkswagen||2% of the Base MSRP|
|Volvo||1% of the Base MSRP|
When figuring out the holdback for the vehicle of your choice, here is how to calculate it based on the table above:
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?You can negotiate using holdback, but not the way you would expect. Most dealers view holdback as a sacred cow and will refuse to negotiate. What you can do is mention the fact that you know about holdback, especially if the dealer is whining about not making any money on the deal.
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.
My Recommendation for Car ShoppersTrueCar No-Haggle, Edmunds Price Promise and 1-800 Car Show are the quickest way to see the lowest car prices in your area. These sites show you no-haggle prices from dealers closest to you - and the deals are usually really good. This should be the first step you take when negotiating your car price. Follow this up with my checklist to make sure you squeeze out every last bit of savings.
- Gregg Fidan
About: Gregg Fidan
Gregg Fidan + is the founder of RealCarTips. After being ripped off on his first car purchase, he devoted several years to figuring out the best ways to avoid scams and negotiate the best car deals. He has written hundreds of articles on the subject of car buying and taught thousands of car shoppers how to get the best deals.