Understanding dealer holdbacks

Once a buyer has secured their car loan, it comes time to negotiate with the dealer. All car buyers should go into the dealership with an idea of the value of the vehicle that they’re looking at and how much they’re willing to pay. Even so, the more knowledge that they are armed with, the better position they are in to negotiate.

That’s where being aware of manufacturer and dealer holdbacks can be useful. This practice, introduced a few years ago, allows dealers to continue to make a profit on a vehicle even when they claim they are selling “at invoice,” according to Edmunds.

In order for a dealer to sell a car, they must first have the model on the lot. When a driver looks at the sticker on the window of a vehicle, they’ll be able to locate an “invoice price.” This is the price that the dealer paid the manufacturer for a vehicle. So if a driver pays the dealer at or slightly higher than the invoice price, they’re getting a great deal, right?

Not necessarily. In order to advertise invoice pricing, many dealers and manufacturers introduced “holdbacks.” What this means is that the dealer overpays for a vehicle when purchasing it, only to be reimbursed by the manufacturer later. So the invoice price might read $18,000 – but that’s before the automaker sends the dealer a check for $600 – or around 3 percent, the holdback rate for many brands. In reality, the dealer is only paying $17,400, still allowing them to profit.

Some brands don’t use holdbacks, but knowing exactly what the dealer is paying at the end of the day is valuable information. Consumers can look up holdback rates for major brands and apply for their car loan online.