In the last post, we discussed the ins and outs of the dealer invoice and the dealer holdback.
It is now time to discuss more about the dealer holdback, and how this neglected amount is preventing you from saving $500 or more on a new car.
Dealer Holdback: The Truth
The exact amount of the holdback will depend on the car dealer and the type of car. The holdback is also based on the MSRP or the invoice price of the car.
The holdback is estimated to be anywhere from 2% to 3% of the MSRP or the invoice price. You might say that this small amount is not significant enough to affect the overall selling price, but in a car that costs $40,000 and a dealer holdback of 3%, that equates to $1,200.
Imagine getting an instant $1,200 savings on a new car. Then imagine the car dealer earning an additional $1,200 profit if you agreed to the dealer invoice price. Which would you choose? This is how car dealers make it possible to advertise "pay below dealer invoice" deals. They earn extra profit just by presenting to you the dealer invoice!
The presence of the holdback is mysterious in a lot of ways, because car dealers claim to use them for a variety of reasons. Car dealers say that they use the holdback to pay for advertising expenses, while some claim that the holdback is actually used to pay for interest expenses on the dealer floor plan.
The good part is that we know what the holdback really is: it is an incentive given by the manufacturer, and it will be paid back or "held back" to the dealer after selling the car. We also know that the holdback allows the dealer to earn huge profits even without overpricing the car.
So what does the consumer have to do?
You should be aware of car dealers that post "below dealer invoice" adverts because now you know this is not true. In order to arrive at the fair selling price, you should do your best to determine the true dealer cost.
Use this equation to arrive at the average true dealer cost of the car that you want:
Dealer invoice - Dealer holdback - Incentives and Rebates + Destination charge + Vehicle options (taxes and licensing not included).
Let us present the formula by using an example. Let's say that the MSRP of the car is $25,000, with a dealer invoice of $23,500. The holdback is 3% of the MSRP and the car dealer is offering $1,000 rebates on the car. The destination charge is $200.
$23,500 - $750 - $1,000 + $200 = $21,950 is the true dealer cost.
If you buy the car using the dealer invoice of $23,500 then the dealer earned $1,550 more from the sale. This is just an illustration on how the dealer invoice will fool you into thinking that you got a great deal, when in fact, there is a better deal if you paid attention to the true dealer cost.
Remember that when buying a new car, whether a small family car or an SUV, you should try to determine the true dealer cost in order to pay less money on any type of new car.