Many car buyers don't understand what the dealer holdback is, what it is used for and what its role is, if any, in the deal-making process.
Dealer holdback is a percentage of either the MSRP or invoice price of a new vehicle (depending on the manufacturer) that is repaid to the dealer by the manufacturer. The holdback is designed to supplement the dealer's cash flow and indirectly reduce "variable sales expenses" (code words for sales commissions) by artificially elevating the dealership's paper cost.
Many car buyers attempt to use the amount of the dealer holdback to compute what the net price of a vehicle is to the dealer, with the intention of using that amount as a basis for negotiating a purchase price.
However, as described below, determining the dealer's actual net cost is difficult even for seasoned automotive insiders. This is why we developed the Edmunds.com True Market Value®(TMV®) pricing system, which is our determination of what other consumers are actually paying for the vehicle. TMV® accounts for the effect of all of the manufacturer's extra charges as well as the dealer's hidden subsidies, and we believe it is the most important price to know when negotiating your purchase.
Still, some car buyers like to set the price themselves or push for an even better deal. And others might just want to know more about the holdback amounts and process. So we've written this article to clear up some of the confusion.
What Are Holdbacks For?
Dealerships must have an inventory on hand so that consumers can browse and ultimately select a vehicle. Dealerships must pay for this inventory when it is obtained from the manufacturer, and the amount the dealer pays is the price reflected on the invoice from the manufacturer to the dealer, the so-called "invoice price."
Now the twist: with the introduction of holdbacks some years ago, most manufacturers inflated the invoice prices for every vehicle by a predetermined amount (2-3% of MSRP is typical). The dealer pays that inflated amount when it buys the car from the manufacturer. But later, at predetermined times (usually quarterly), the manufacturer reimburses the dealer for that excess amount. This is the "holdback," so named because funds are "held back" by the manufacturer and released only some time after the vehicle is invoiced to the dealership.
Why the sleight-of-hand you might ask? Because holdbacks can benefit dealers in three ways:
- Dealerships borrow money to finance cars based on an invoiced amount that includes the holdback. So the higher the invoiced amount, the more the dealership can borrow from its lender.
- Inflating the dealership's "cost" can have the effect of increasing profit, since sales personnel are paid commissions based on the "gross profit" of each sale. Holdbacks have the effect of lowering the gross profit and thus the sales commissions.
- Holdbacks enable dealerships to advertise "invoice price" sales and sell their vehicles at or near invoice and still make hundreds of dollars on the transaction.
Holdbacks Allow "Invisible" Dealer Profits
This holdback amount is "invisible" to the consumer because it does not appear as an itemized fee on the window sticker. For example, let's say you're interested in a Chevrolet with a Manufacturer's Suggested Retail Price (MSRP) of $20,500, including optional equipment and a $500 destination charge. Let's also say that dealer invoice on this hypothetical Chevy is $18,000. The cost of the car includes a dealer holdback that, in the case of all Chevy vehicles, amounts to 3% of the MSRP, or $600. (Note that the $500 destination charge should not be included when computing the holdback.) So, on this particular Chevy, the true dealer cost is actually $17,400. Even if the dealer sells you the car for the invoice price, which is unlikely, he would still be making as much as $600 on the deal (when his quarterly check from GM arrives).
Dealer holdback allows dealers to advertise attractive sales. Often, ads promise that your new car will cost you just "$1 over/under invoice!"
Almost all dealerships consider holdback money "sacred" and are unwilling to share any portion of it with the consumer. Don't push the issue. Your best strategy is to avoid mentioning the holdback during negotiations. Mention holdback only if the dealer gives you some song-and-dance about not making any money on the proposed deal when you know that isn't true.
However, the standard dealer holdback is not the only form of financial assistance provided to dealers by manufacturers. There are many other types of holdbacks and dealer credits that may be available from specific manufacturers at various times — some of which consumers may hear about and others of which are never disclosed to the public — but each of which can have the effect of reducing the net cost of a vehicle to the dealer. These include:
- Advertising credits
- Flooring assistance
- Floor interest reserve
- Floor plan allowance
- Transfer balance
- Wholesale reserve
- Wholesale credits
Negotiate Using Incentives, Not Holdbacks
In addition, the dealer stands to reap further benefits if there is "dealer cash" being offered by the manufacturer on the car you are considering. In many instances you can learn about dealer cash in our Incentives and Rebates section. However, unless you know all of these other fees (and who does?), establishing the dealer's true cost can be frustratingly elusive. It's for this reason that Edmunds.com has established True Market Value® pricing that accurately reflects "what others are paying" by taking into account all of these fees. The Edmunds.com True Market Value Price® is the "bottom line" and what you really need to know in order to negotiate a fair deal. Check it out at: http://www.edmunds.com/tmv/new/.
In summary, holdback is nice to know, but is just one small piece of a complex puzzle.
Domestic manufacturers (Ford, General Motors and Chrysler) generally offer dealers a holdback equaling 3% of the total sticker price (MSRP) of the car. Foreign manufacturers (Honda, Toyota, Volkswagen etc.) provide varying holdback amounts that are equal to a percentage of total MSRP, base MSRP, total invoice or base invoice, as indicated in the list below.
|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|
|FIAT||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|
|Mazda||1% of the Base MSRP|
|Mercedes-Benz||1% of the Total MSRP|
|Mercury||3% of the Total MSRP|
|Mitsubishi||2% of the Base MSRP|
|Nissan||2.8% of the Total Invoice|
|Ram||3% of the Total MSRP|
|Saab||2.2% of the Base MSRP|
|smart||3% of the Total MSRP|
|Subaru||2% of the Total MSRP (Amount may differ in Northeastern U.S.)|
|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 calculating holdback, use the following guidelines.
If a holdback is calculated from the:
- Total MSRP: consumers must include the MSRP price of all options before figuring the holdback.
- Base MSRP: consumers must figure the holdback before adding desired options.
- Total Invoice: consumers must include the invoice price of all options before figuring the holdback.
- Base Invoice: consumers must figure the holdback before adding desired options.
(Go to Current Incentives and Rebates)
Revised November 2008