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.
3 Steps Every Car Buyer Needs to Take to Save Maximum MoneyThe key to getting the best deal is to gather price or lease bids from as many local dealers as possible. Then shop that best price around until no one can beat it. Here are the steps:
Step 1 Get Prices From My Trusted NetworkSelect the vehicle you're interested in to see if there are local dealers in my network who will provide you with their best upfront price. You will get direct access to an internet sales manager who you can further negotiate with online (no need to visit dealership).
Step 2 Get Prices From TrueCar / CarsDirectTrueCar, and CarsDirect are my top 2 online price quote recommendations. These services show you pre-negotiated prices from dealers closest to you - and the deals are usually pretty decent. But remember, you can still negotiate further.
Step 3 Complete my ChecklistFollow this up with my checklist to make sure you squeeze out every last bit of savings.
- Gregg Fidan
Each week, I'll keep you up-to-date on the latest car deals and news that might affect your purchase. This includes...
- Best Rebates, Incentives, and Lease Deals
- Latest Car Buying Scams and Tricks
- The Best & Worst Time to Buy a Car
- Which Cars You Should Avoid