What Is A Dealer Holdback?
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A dealer holdback is an amount of money that a car manufacturer effectively charges a dealership when they buy the car but then repays to the dealership at the end of the quarter or the year. This amount is typically around 3% off the MSRP of the vehicle, according to Edmunds.
So, why would the dealerships be okay paying extra money to the manufacturer now only to get it back later? Why wouldn’t they buy it at a lower price? This practice doesn’t benefit consumers, but it does benefit the dealership and (hopefully) its employees. CoPilot will help explain how in this article.
How Do Dealerships Benefit?
The amount of money a dealership pays the carmaker is called the invoice. This price is posted in an itemized list on the window sticker of the car, so you can see how much the dealer paid for the vehicle, what additional equipment was added, and what fees you will be charged that determine the manufacturer’s suggested retail price. But by adding the holdback, the dealership can increase that invoice price they tell you.
That, in turn, lets them charge you more for the same car, which does help the dealership with the expenses they have. It also increases the dealership’s profit cut at the cost of commissioned salespeople. Since the commission is based on the profit made from the sale and each sale has a lower profit margin when the invoice price is raised, the dealership pays out less money to the salesperson. It makes money back at the end of the quarter when the manufacturer reimburses them.
While this is a bad thing if you work in sales (or want to buy the car), it does help cover the expenses of running a dealership, such as rent, salaries for their employees, electricity, and the money needed to buy more inventory.
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How Can You Benefit?
This practice also allows dealerships to offer deals that seem even better than they really are. Your local dealership can tell you that they are selling a car for “just the invoice price” to make you think they are selling it at no profit. They technically aren’t lying to you, charging you the invoice price, but that invoice is artificially increased.
This allows for competitive pricing and a convincing sales pitch while the dealership can still make some money off the sale. This could still give you a price well below the MSRP of the vehicle but bear in mind that you will probably only be able to buy a new car for the invoice cost that the dealership paid, even with the holdback.
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According to Edmunds, these are the holdback amounts offered by many of the top auto manufacturers in America:
(Total MSRP is the expected sale price after all options, base MSRP is the expected sales price before options, the total invoice price is how much the dealer pays for the car and all additional options, while the base invoice is the price the dealership pays for the car alone.)
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These numbers are subject to change. Certain times like the end of the month, end of the quarter, and end of the year, are likely to have better deals. But the most important thing is constantly researching before going to the dealership. The holdback is one aspect of the price you have no control over, but you can make other efforts to pay less for a new car.
If you want to take advantage of the same software the dealerships use to check local inventory, you can use the CoPilot free app or the CoPilot Search website. By searching ahead of time, you can hunt for the best deal in the area, and once you know how much the car will cost, you can hunt around for the best financing options available. You want to look for a loan agreement with a low-interest rate and reasonable monthly payments, and you probably want to avoid a loan with a balloon payment at the end.
Frequently Asked Questions
Q: How is dealer holdback calculated?
A: The dealer holdback amount is highly variable. However, the dealer holdback is generally calculated as a percentage of either the car’s Manufacturer’s Suggested Retail Price (MSRP) or Invoice Price. Each car manufacturer establishes its holdback policy, usually up to 3% of the total MSRP. The actual calculations may include optional features like AWD, a premium audio system, or a technology package.
Q: Can you negotiate using dealer holdback?
A: You may use the dealer holdback for negotiation, but in a different way than you may expect. In reality, the holdback is basically the dealership’s money, so they will not be thrilled with the idea of negotiating it down. However, it can be worth mentioning that you’re aware of the holdback, especially if the salesperson complains about not making any money on the sale at hand. The dealer may be willing to dig into their holdback a bit. It’s good to know about dealer holdbacks and treat them as another piece of the car sale puzzle.
Q: Do all manufacturers have holdbacks?
A: Domestic manufacturers usually have 3% holdbacks, while foreign companies offer varying percentages up to 3%. However, some companies, like Audi, BMW, MINI, Jaguar, etc., have no holdbacks.
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