Car Buying Articles

Dealer Holdback

What It Is and How It Works


  • Skip the Holdback Discussion

    Skip the Holdback Discussion

    Dealer holdback should be considered a "no-fly zone" for consumers. Car dealers rarely will allow car buyers to use the figure in negotiations. | July 29, 2013

3 Photos

Dealer holdback is designed to supplement the dealer's cash flow and indirectly reduce "variable sales expenses" (another way of saying "sales commissions") by artificially elevating the dealership's paper cost. The holdback is a percentage of either the manufacturer's suggested retail price (MSRP) or invoice price of a new vehicle that the manufacturer repays to the dealer.

Some car buyers try to use dealer holdback to calculate the net price of a vehicle to the dealer, with the intention of using that amount as a basis for negotiating a rock-bottom price.

However, determining the dealer's actual net cost is difficult, even for seasoned automotive insiders. Instead, it's better to focus on tangible numbers like the Edmunds.com True Market Value (TMV®), which is an average of what other people are paying for a car in a given area.

Having said that, some car shoppers still may wonder about holdback amounts and the holdback process. Here are the basics.

What Are Dealer Holdbacks for?

Dealerships have an inventory on hand so that consumers can browse and ultimately choose a vehicle. Dealerships pay for this inventory when they obtain vehicles from the manufacturer. The amount the dealer pays is the price reflected on the invoice from the manufacturer to the dealer. This is 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 percent 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 the excess amount. This is the "holdback," so named because funds are "held back" by the manufacturer and released only after the vehicle is invoiced to the dealership.

Why the complex accounting? Because holdbacks can benefit dealers in three ways:

1. 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.

2. 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.

3. 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

The 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 an MSRP of $20,500, including optional equipment, and a $500 destination charge. Let's also say that the invoice price 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 percent of the MSRP, or $615. (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, he would still be making about $600 on the deal, once the quarterly check from Chevrolet arrives.

Dealer holdback allows dealers to advertise attractive sales. Often, ads promise that your new car will cost you just "$1 over 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 claims he's not making any money on the proposed deal when you know that isn't true — because of the existence of holdbacks.

The standard dealer holdback is not the only form of financial assistance that manufacturers provide to dealers. 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. Each of these can have the effect of reducing the net cost of a vehicle to the dealer. They 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 that the manufacturer offers dealers on the car you are considering. In many instances, you can learn about dealer cash in Edmunds' Incentives and Rebates section. However, unless you know all of these other fees, establishing the dealer's true cost can be frustratingly elusive. This is why Edmunds.com established TMV pricing, which accurately reflects what others are paying by taking into account all of these fees. The Edmunds.com TMV price is an effective reference point in negotiating a fair deal.

In summary, holdback is nice to know, but is just one small piece of a complex puzzle.

Domestic manufacturers (Chrysler, Ford and General Motors) generally offer dealers a holdback equaling 3 percent 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 table below. Some manufacturers don't use holdbacks, as shown.

Make Holdback
Acura 2% of the Base MSRP
Audi No holdback
BMW No holdback
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
Jaguar No Holdback
Jeep 3% of the Total MSRP
Kia 3% of the Base Invoice
Land Rover No Holdback
Lexus 2% of the Base MSRP
Lincoln No Holdback
Mazda 1% of the Base MSRP
Mercedes-Benz 1% of the Total MSRP
Mercury 3% of the Total MSRP
MINI No Holdback
Mitsubishi 2% of the Base MSRP
Nissan 2.8% of the Total Invoice
Porsche No Holdback
Ram 3% of the Total MSRP
Scion No Holdback
smart 3% of the Total MSRP
Subaru 2% of the Total MSRP (Amount may differ in Northeastern U.S.)
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 July 2013

Comments

  • eflite eflite Posts:

    After reading this post i went to Consumer Reports and paid $15.00 thats right fifteen dollars US and got a print out of exactly how much a dealer paid for a certain car. I was in the market for a Jeep Liberty, Dealer sticker Price was $28,650.00 so after I conveyed the Vin # of the Liberty I was looking at and called Consumer Reports and told them the Vin # and the dealership where I had planned to make my purchase they informed me that this Vin # was purchased by my dealer for $8,756.00 now why is it that Consumer reports can give the True Value of that car but Edmunds cannot?..It is also true that they do have Hold Backs..they also have Dealer Incentives, ect. ect. ect. from talking with consumer reports here is how they understand it to work. Say my dealership tells the factory that 1). We can sell 100 Liberties for xx,xxx.xx and well buy an extra 20 Liberties at a discounted price for x,xxx.xx here is where the Dealer Incentives kick in. They are actualy rewarded by the manufacturer IF they sell the extra 20 Liberties before year end. 2). After they have sold 120 Liberties for that model year their Incentives for the next year start to kick in. Now for this year the Manufacturer says hey you sold 120 modles last year how bout we give you 150 Liberties this year for X,XXX.XX each and we will remove the hold back and give you 6 options for each of the 150 models at no cost to you. Meanwhile the cunsomer is Ignorant and doesnt know any better that the dealers who move 200-300 cars a year actualy get a reduced price from the auto manufaturers. That is why it is SOO important to educate yourself and join any and ALL clubs that realy do work like Consumer Reports, Wholesalers Clubs and the like. Dealerships are like any other company in the world. If you think for one minute that the dealerships are only making 500-600 bucks on every car in their lot, then why do they have 10-20 salesmen per dealership? Its hogwash. They mark their product up just like any other company.

  • minniedave minniedave Posts:

    Furthermore to the post above, Edmunds "True Market Value"????? If TMV shows what "people are actually paying", the number is only valuable to me if it represnets the purchase price of buyers with great negotiating skills. It's entirely possible that TMV reflects the efforts of very poor negotators.

  • cobraglf cobraglf Posts:

    If Edmunds didn't have advertisers or people that pay a premium for someone's advice whom they have never met, they would not be around to give over egregious information. If a dealership operates at NO profit, they wouldn't be there to service the customer when they need it. I am not familiar with any business that stays around by not making some sort of profit. They have to (in the very least) keep the lights on and pay their employees. I understand not having to overpay for something, as this is what has made Wal-Mart so very popular, and in the process run many mom and pop stores out of business, but when people pander to the rants and raves of websites that make a living out of trying to HELP? consumers, they are in fact doing a disservice. If a dealership keeps their holdback as their only profit, and chooses to sell vehicles at sticker, then go ahead and be glad you are getting a deal. And when you wake up in the morning and go to work just hope someone doesn't come in to your place of employment, and try and squeeze you into shuttering your windows. Never once has any business stayed operative by not making money. INCLUDING EDMUNDS!!!

  • thatlaoguy thatlaoguy Posts:

    Nice now I have a better understanding of holdbacks. I always pondered why dealers would sell cars for invoice and claim there's no money to be made. @eflite a very informative post. I'm shocked to hear that cars are bought for such a price if a dealer sells well. I'm tired of all the lies in the auto industry. This is why I refuse to buy a new car because of these lying salesmen. Tell me if you would do business with a liar because I won't!

  • austincraft austincraft Posts:

    Holdback is actually money to be used for advertising and other related expenses like insurance to sell that vehicle and gets taken away from the dealer. In some cases the money goes to the dealer and the longer the vehicle sits on the lot the less money is in the holdback and will go to a 0 balance. The thing is though the salesman doesn't make any money and they have families too. The dealer makes the most of course and sales usually gets paid 20-25% gross profit so if they make 1000 they get paid 200-250$. They do not however get paid off the holdback! If they sell you a vehicle at invoice pricing then usually they get a mini deal which is anywhere from $50-$100. So most salesman sell about 10-15 cars a month if that in this day and age. Some are making only $1000-$1500 a month!!? If you have kids and a wife then how can you live off of that. Give the salesman a break they are only trying to make a living in this tough economy and sales is more stressful now because of the internet and because car salesman can't make a living or career at it. That is one reason why there is a high turnover of salespeople. Be considerate of other people because the consumers are ripping off the salesman.

  • pnnp pnnp Posts:

    question for eflite.... so did you end up with the jeep liberty and if so how much did you end up paying for it?

  • pnnp pnnp Posts:

    question for eflite.... so did you end up with the jeep liberty and if so how much did you end up paying for it?

  • motoyota_ motoyota_ Posts:

    @Eflite: You just gave everyone on this site the most inaccurate information you could mustard. You seriously think dealerships buy 29,000 dollar cars for under 9,000?? You also think that a "3rd" party has exact invoice based on the vin #. WRON

  • waiting4 waiting4 Posts:

    TMV only notifies you of what others have (over) paid for a vehicle.

  • shaoyang shaoyang Posts:

    hi Eflite, i tried to learn from you and do the same thing but Consumer Reports said they couldn't get report from VIN # (only from model and options etc). how did you do that? thanks!

  • supermaneah supermaneah Posts:

    Eflite I would really like to pick your brain for a min, please respond asap.

  • Well, this is truly informative. I wish the holdback wasn't hidden. Just offer the lowest price without all the haggle.

  • DLu DLu Posts:

    @ austincraft, 1. What people are not happy about is dealers' routine practice of concealing information from the consumer, not the fact that they make money. If a consumer concealed information from the dealer and ended up paying less money, then you

  • nsolinsky nsolinsky Posts:

    Im a salesman at a Honda dealership. It is very rough in this business to make anything. We don't walk into a target and start suggesting what we want to pay for items. We also do not go to a supermarket and make the same suggestions. The car business is one of the toughest environments to be in. Everything is published online so that everyone is aware what is paid on a vehicle. People do not think its reasonable for a dealership to make 3% profit margin on such a high end purchase. A comment below is also correct. A salesman makes only 20% off what the dealership makes. This is also after a $500-1000 that our specific dealer holds as a pack. Meaning if the dealership makes $2,000 on a car. After the pack, there is $1,000 left and the salesman will make $200. It is quite a huge sum of hours and very little compensation. I agree, what would it be like if we were to walk into your work environment and tell everyone to take a huge paycut because everyone is negotiating on our product/service. This is the case for us because it is not a few salesman that are making less, it is every last salesman that exists. We are all just trying to make a living...........and what business survives without making a profit?

  • bpence1 bpence1 Posts:

    EFLITE---You sir, are a liar and also one special kind of idiot! If a car dealer could really make $20,000 GROSS PROFIT on a NEW car....there isn't a car dealership on the PLANET that would sell used cars to make $1,000-3,000 each. MORON!!!

  • bam5590 bam5590 Posts:

    The guy named eflite is a liar. There is no discount to dealers who buy cars in volume. Most manufacturers allocate cars to the dealers by who sells the most not buy who can buy the most.. It's called turn and earn. The more you sell, the more you can buy.

  • redxsage redxsage Posts:

    Meh. I just look at the sticker price, multiply it by 0.85, and ask for that amount OTD. Works fine.

Leave a Comment
ADVERTISEMENT

Featured Video

ADVERTISEMENT

Get Pre-Approved for a Car Loan

up2drive

Get Pre-Approved for a Loan


Car.com

Credit Problems?
We can help you get Financing!

ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT
Have a question? We're here to help!
Chat*
Chat online with us
Email
Email us at help@edmunds.com
*Available daily 8AM-5PM Pacific
Phone*
Call us at 855-782-4711
SMS*
Text us at ED411