You may have heard this before when negotiating to buy a new car at invoice price: "But I have to feed my family," pleads the finance guy at the dealership, "I don't want to lose the shirt off my back." So did you ever wonder why some car dealerships let their cars go at invoice, when all possible customer rebates have been taken into account and at a price that seems to leave a dealer no operating profit? It has to do with a little-known secret called dealer holdback. If the dealer has a sensible buying strategy, a complex series of payments from manufacturer to dealer and the bank will ensure he's always able to feed his family, oftentimes regardless of how good a deal you secure.
First Things First
Perhaps most importantly for the reader and buyer, many of my contacts in the auto industry -- all of them professional consumer advocates -- advised me to steer clear of the subject of dealer holdback. The most salient reason for this is that rarely, if ever, is dealer holdback open to negotiation, therefore it has little relevance for the buyer.
Overriding this, however, is the oft-told story about somebody who bought a car at invoice -- in my case, I was told that a co-worker's boyfriend had secured an Infiniti coupe -- and why this was the best deal they could possibly have secured. Well, the dealer still made money on that deal -- provided the car wasn't on the lot over 90 days -- through dealer holdback. This means, theoretically, the salesman at least has another margin to work with -- a useful nugget of information that a potential car buyer could use in their favor.
Michael Royce, at beatthecarsalesman.com, tells AOL Autos: "The truth is that it's really difficult to negotiate into the holdback. It's not impossible, but it's not for the squeamish. I've only seen a few car buyers ever successfully do it. They were very smart and persistent -- and lucky.
"My bottom line advice for car buyers is this: "Don't worry about the holdback. Let the dealership have their little 'extra' profit. There's plenty of other ways to save money when buying a car."
Buyers' experience suggests that even if a salesman acknowledges that dealer holdback exists on a vehicle, they will not negotiate over it. Apart from his job, there are perhaps fewer things more sacred to every car dealer. So just what is dealer holdback?
Dealer holdback is a complex system of payments made to the dealer from the car manufacturer which enhance the dealer's ability to stock his inventory with lots of shiny new models. The dealer finances his forecourt purchases through a bank or his dealership's finance unit, while the manufacturer likely will pick up the interest charges for the first 90 days a vehicle sits on the lot (the holdback, which can work out from anywhere from a few hundred dollars to a thousand or more).
If a dealer sells a car within the 90-day period, often they can bank all of the holdback (the full interest charge has been wrapped into the invoice or MSRP price of the car). The dealer pays the price of a new car -- the invoice -- to the factory when they order it, not when they sell it. If a car stays on the forecourt for just a week, the holdback can add up to serious profit for the dealer. Also note that, if the car has been sitting 90 days or more, all of the holdback has essentially been exhausted by the interest payments on dealer's initial loan to acquire the car.
Which Carmakers Offer Holdback?
Many luxury marquee manufacturers don't offer holdback -- including heavyweight imports Audi, BMW, Porsche and Jaguar -- while standard holdback for most other carmakers runs anywhere from 1% (Volvo) to 3% of MSRP at the top end (Honda, Dodge and most GM imprints). Mercedes-Benz breaks the rule for luxury importers by offering holdback rates of 3%. Ford offers incentives totaling 4.25% to its certified Blue Oval dealers (manufacturers increasingly offer higher rates to preferred dealers). Hyundai rates sit at about 2% but sources tell me the Korean carmaker has increased that substantially this year. Note that holdback is offered on MSRP and not the lower rate for invoice.
A Change in the Industry
Duane Overholt, of stopautofraud.com, sees a change in the industry in the last year. He says that, because margins have become tighter in an ultra-competitive market, "dealers are seeing very little profit up front but they're getting lots of holdback."
He says dealer holdback is standard across the industry and affects not just the consumer, but also the dealership's employees. He says that manufacturers are trying to move the salesman into a "flat" position, where they get little commission from sales but reap higher rewards from holdback (often tied in with higher rates for unit sales bonuses -- or a higher rate of reward for selling more units). As salesmen are paid commission on gross, the lower price will dent their commissions.
Overholt says the problem with trying to negotiate holdback is that, "Nobody knows what [amount] holdback is.
"[The]only ones who know about it are the sales managers and the manufacturers. Low-level closers don't know what that is. They're paid off total gross. Top managers still are making lots of money but it hurts the salesman and the consumer."
Though it's extremely interesting to delve into the particulars of holdback as a study into how the car sales industry works, a thorough understanding of the process won't necessarily get you a better deal. What it provides is another useful piece of information that can help level the playing field just a bit more, evening terms between buyer and salesman. Nothing should ever be hidden in any bargaining process but dealer holdback is not widely known among car buyers. But did you ever, really, expect a finance guy to lose his shirt?