Many of us are intimidated by the prospect of purchasing a new dealership vehicle. It requires dedicating time to researching prices, then finding the price of what is considered a good value before going to an actual dealership to further negotiate their costs to match what you find online. And while certainly, with the availability of information now, customers do have more power at the negotiation table than ever before, it still requires the confidence and skill to haggle pricing that many of us wish we had.
Understanding vehicle pricing can also still be tricky. There are generally several prices that you can find associated with a vehicle: Base MSRP, total MSRP or sticker price, and invoice price. The base manufacturer's suggested retail price (base MSRP) is the recommended price the manufacturer believes the car should be sold at without any options or add-ons. Total MSRP, or sticker price, is the suggested price of a vehicle with its added options, destination charges, and dealership add-ons. The invoice price is the price the dealership paid the manufacturer for the vehicle.
The MSRP is, of course, only a suggested price and dealers have the freedom to ask for more or less than this figure depending on market demand and how well the customer negotiates. In many cases, a customer will insist on paying less than MSRP. But a vehicle's sticker price has an unknown and varying built-in profit margin that is split between the dealership and the sales agent as commission, which means it's difficult to really know if you really got the lowest price on your purchase.
So the invoice price is therefore best price you can get on a new vehicle, right? After all, it's essentially the price the dealership paid for the car. Well, not necessarily.
Invoice Prices Are Inflated
Because consumers were getting more knowledgeable in the actual prices of vehicles and increasingly asking for a final sales price based on invoice, dealerships a few years ago invented dealer holdbacks. A dealer holdback works by artificially elevating the dealership's paper costs by building in a predetermined profit margin (generally 2-3% of MSRP) at invoice price. The dealership pays the manufacturer a higher invoice cost for each car, and later at predetermined times, usually quarterly, the manufacturer reimburses the dealer for the excess they paid. This is the "holdback," named so as a monetary amount that is effectively "held back" by the manufacturer and only released later to the dealer when the vehicle is sold. Think of them as purchase rebates for dealerships.
With dealer holdbacks, a dealership can effectively earn a profit even when a vehicle is sold at invoice price. And any amount over invoice price a vehicle sold at remains with the dealer as additional profit.
But that's not the only benefit dealerships get with dealer holdbacks. Sales personnel are generally paid commissions based on gross profits from each sale they make. With holdbacks, because invoice costs are higher on each vehicle, gross profits are lower on paper, allowing salespeople to be paid less for each sale they make. Holdbacks also allow dealerships to advertise invoice prices to create seemingly great deals for consumers. In reality, they are still making hundreds of dollars on each transaction.
Holdbacks Are Invisible to the Consumer
The holdback amount is "invisible" to a consumer as it does not appear as an itemized fee on the window sticker and is generally not freely available to the public. Invoice prices are held pretty tightly by dealerships and will require a bit of digging and prying on your part during the negotiations. The reality is, most dealerships are unlikely to provide you any holdback money as it's their last line of defense to make any amount of profit on a vehicle. Dealerships actually make very little margin on new vehicle sales, so during negotiations, it's probably actually best to avoid discussing holdbacks. Bring up the topic only when a dealer states they are not making any profit on a proposed deal or at invoice price. Explain to the dealer you know that's not true due to the existence of dealer holdbacks.
So What Should You Negotiate If Not Holdbacks?
To get the best value on a new car, propose that a fair deal is a few hundred dollars above invoice or their invoice price. That way you get a good deal, and the dealer still makes a margin. Negotiate using incentives and dealer cash backs. Dealer cash backs are discounts given to them by the manufacturer to steer customers away from competing brands. Some of these cash back discounts can then be passed to you in the form of a lower vehicle price. Promotions can exist nationally, regionally, and even locally.
Also, don't forget about the costs of financing. Many buyers become wrapped up on negotiating the best vehicle price that they lose sight on also negotiating the best financing terms. Ask for a lower interest rate or leasing terms as dealers have some sway with their lender partnerships. Use LendingTree to shop, compare, and look for other auto financing terms before going to a dealership and bring your offers with you. You'll either find a better deal elsewhere through another lender or have leverage for negotiating better terms at the table.
It's helpful to know what a hold back is, but it's only one piece of the negotiation strategy. It might not always be possible to find a dealer's true cost, so use your best judgement and use trusted sites that provide real market values and what others paid for similar vehicles. Some manufacturers also don't use holdbacks, but many do. Here is a list of dealer holdbacks by vehicle brand.
|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% of the Total Invoice|
|Ram||3% of the Total MSRP|
|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|
- Total MSRP: If holdback is based on Total MSRP or sticker price, include the price of the vehicle and all options.
- Base MSRP: If holdback is based on a vehicles base price, calculate the holdback before options and fees.
- Total Invoice: Calculate the holdback based on the invoice price of the vehicle and what the dealer paid for options and add-ons.
- Base Invoice: Calculate the holdback based on the invoice price of the vehicle only.
Information on this chart was based on 2013 revisions. Data may have changed as of the date of this publication and current holdback percentages may be changed by individual manufacturers at any time.