Dealer Holdback

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. But in the end, trying to figure out the dealer's true cost may be impossible. 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.

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