Dealer Holdback: What is it, exactly? | Cars and Trucks

By JasonLancaster
Total views: 8
Word Count: 443

Auto manufacturers pay dealerships money to stock their inventory. This is called holdback.

Since having cars on their lot is something that dealerships need to do in order to sell cars and make a profit, why would an auto manufacturer ever pay a dealership to do something they need to do anyway?

The answer is that most dealerships need to borrow money to put cars on their lots. Think about it this way: if a dealership has 200 cars, and the cars cost an average of about $25,000 each, that's $5 million in inventory. Dealerships, like most other businesses, don't have that kind of cash flow, so they need to borrow the money to pay for every car on the lot.

Think about the amount of interest to borrow 5 million dollars. These interest payments, called "floorplan," will add up to a lot of money very quickly. It will cost anywhere from $3 to $20 each day per vehicle in inventory, depending on the interest rate. Now think about how expensive it would be to stock an inventory of 200 cars with that kind of interest! Due to this expense, dealers wouldn't be able to stock many vehicles.

Thirty or forty years ago, manufacturers, eager to sell as many cars as possible, decided that it made sense to pay dealers some "floorplan assistance" so that they would be able to stock more cars. Today, dealers receive 2-3% of the price of every vehicle back from the manufacturer when they sell the car. That money is supposed to be used to offset inventory costs.

Most dealers count holdback as part of their income used to offset a major expense. However, you may be able to find dealers that have such a high turnaround that they actually profit from holdback. By selling all of their inventory very quickly, and therefore incurring little or no interest charges on their borrowed money, these dealers profit from the interest subsidy. Because many dealers already have a thin profit margin, they feel they don't need to share any holdback with their customers. Besdies, they usually don't have to worry about the consumer asking for any of their holdback profit since most consumers don't even know about it.

If you're trying to get the best deal, follow our standard car negotiating advice, and also remember to go online and get multiple quotes. If there's a vehicle the dealer really wants to sell and you're interested in it, you might be able to convince them to sell it for less than invoice. Even if they don't make a profit, they'll still have their holdback money, and you would have gotten the vehicle at a bargain price.

About the Author

Author Jason Lancaster, an auto business veteran, developed AccurateAutoAdvice.com. You'll find accurate advice on dealer hold back and new car buying tips.

You are here Articles > Cars and Trucks