Dealer holdback is an amount, typically two to three percent of the manufacturer’s suggested retail price (MSRP), that is part of the invoiced price the dealer pays the manufacturer when it buys a car. However, this amount is actually returned to the dealer after the car is sold. That’s why it’s called a holdback – because it’s “held back” by the manufacturer but rebated at a later date.
Dealer holdback is an amount, typically two to three percent of the manufacturer’s suggested retail price (MSRP), that is part of the invoiced price the dealer pays the manufacturer when it buys a car. However, this amount is actually returned to the dealer after the car is sold. That’s why it’s called a holdback – because it’s “held back” by the manufacturer but rebated at a later date.
Holdbacks enable dealerships to increase profits three ways. First, because they are part of the invoiced cost, dealers that finance their purchases can borrow against the inflated invoice price, allowing them to borrow a higher percentage of the car’s value and increase their cash flow. Holdbacks also reduce the dealer’s profit on paper. If their salespeople’s commissions are based on the amount by which they exceed the dealer’s invoiced price, padding this amount reduces the amount of commission the dealership pays. Finally, artificially high invoices allow dealerships to sell vehicles at or near the “invoice price” and still make hundreds or thousands in profit.
Sometimes, a car’s sticker price lists dealer holdback as a charge to the buyer – as though the dealer is merely passing along its costs when it sells the car. That’s misleading, however, because the dealership gets that money back once the car sells. A holdback listed on the sticker may be up for negotiation if the car is not in high demand.
Not all manufacturers add holdbacks, however, and some have other ways of reimbursing dealership costs. Experts recommend that buyers be aware that holdbacks exist (good to know when a dealer claims that he or she isn’t making anything on a deal). However, holdbacks are difficult to ferret out and it is not recommended that consumers try to negotiate away a holdback. Rather than attempting to determine a dealer’s cost and grinding away at every potential source of revenue, it is recommended that car buyers research what others are paying and work from that number.