Updated 11/12/2012 02:15 PM
The Car Coach: What is holdback?
Nobody likes to pay retail, especially on a new car. Today, Lauren Fix, The Car Coach, shows you a few ways to negotiate a better price on your next car purchase.
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Although you may be familiar with incentives and rebates, you may not have heard of the term “holdback” when it comes to buying a car.
What is holdback and how much money did your dealer make on your car? Let’s take a closer look.
When you buy something as simple as beef jerky or clothing, you don't spend six hours researching how much the retailer paid for the product. For that matter, when you buy a home, you don't ask how much the builder invested into its construction. When it comes to cars, however, consumers can never be deterred from researching the dealer's actual costs. The term “dealer 'holdback” refers to a sum of money paid to a dealer by the manufacturer after a car is sold.
According to TrueCar.com, holdback makes up anywhere from one to three percent of the price of a car. What this really means is that holdback is a built-in rebate that spikes the dealer's invoice price.
If a manufacturer wants $20,000 from a dealer for a car, knowing that it might need to pay a two percent holdback once the car is sold, the manufacturer will charge the dealer $20,400 for the car. That $20,400 is now the official invoice price that appears on the window sticker or Monroney at the dealership. Once the car is sold, the dealer receives a check for $400.
Holdback is an inexact number. It is calculated differently from brand to brand, but it can provide the dealer a number of benefits, including being able to sell a car at invoice price and still make a profit. Now, $400 isn't much on a $20,000 transaction, but you get the point. To make the sale on a car that has been sitting on the lot a long time, it may be worth selling a car at invoice price.
Understanding dealer holdback is important. New car shoppers need to identify a competitive price for the exact vehicle they’re purchasing and have an agreed upon price point to negotiate from. Almost everyone uses invoice price or MSRP as a starting point for negotiating.
I recommend checking out websites like TrueCar.com and Edmunds.com to research what others have actually paid for their new cars in your area and then find an even better price.
Always look for the latest incentives, find rebates at manufacturers’ websites, seek out unbiased pricing information, research specifications and trim options and shop for cars at more than one location.