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Dealer holdback is an amount of money paid to a car dealership from the manufacturer on each new vehicle they sell. Every automaker offers a different amount, but typically, dealer holdback is a percentage of the MSRP that ranges between 1% and 3%. Dealer holdback is predetermined for each vehicle on the dealer’s lot, and it’s essentially whatever the manufacturer decides to offer.
Understanding what dealer holdback is and how you can use it to your advantage can be helpful in negotiations.
Today, we’re going to dive deep into dealer holdback and explain how you can use it to your advantage when buying your next car
Dealer Holdback won’t be on a vehicle’s window sticker
Dealer holdback is often considered an “invisible” profit line for the dealership. That’s because it will appear on the dealer’s invoice but does not show up on the vehicle’s Monroney label.
As a car buyer, the only way you’ll know what the dealer’s holdback is is to get your hands on the dealer’s invoice for the vehicle. Each automaker lists the dealer holdback in different ways on the vehicle’s invoice, however you can usually find the dealer holdback amount by looking for “DH” and then some numbers near it on the invoice.
You’ll never see “dealer holdback” on a vehicle’s window sticker since it is not part of a vehicle’s selling price. Remember, the window sticker lists out the price of all components of a vehicle, but it doesn’t tell you what a dealer paid for that vehicle, nor what incentives or extra cash the manufacturer gives to the dealer.
The Function of Dealer Holdback
Where did dealer holdback come from? That’s a great question. As information about dealer invoice pricing became more readily available, car buyers would frequently ask dealers to sell them vehicles at invoice price (or near it). As more and more dealers sold their inventory at invoice price (or sometimes even below it in an effort to hit their volume-based manufacturer incentives), they realized that their once high “front-end” gross profit margin was shrinking. Customers wanted to (and still want to) see a dealer’s invoice so that they know they are getting a fair price, however dealers didn’t want to keep eating into their front-end profit margins. What could possibly be the solution? Dealer holdback.
Dealer holdback essentially “came to be” because car dealers realized they needed to share their invoice price with consumers to convince them that they were getting a fair deal, only for the dealer to then make x% profit from the “holdback” from the manufacturer. In the simplest terms possible, dealer holdback is simply hidden profit for the dealer that exists to convince car buyers that they are getting a car deal “at invoice price” and the dealer “can’t go any lower.”
Making sense?
Before the proliferation of dealer’s sharing invoices with customers, there was no need for dealer holdback, however it’s fairly obvious why it’s as important as it is now for car dealerships.
Use Dealer Holdback when you negotiate
When you are negotiating a new car deal we strongly recommend getting your hands on the dealer’s invoice. We’re working on compiling the world’s only repository of dealer invoices thanks to CarEdge community members like yourself who submit them to us, but that’s going to take some time.
In the meantime, the only way you can get a dealer’s invoice is to ask them for it at the dealership. When you do get your hands on a dealer’s invoice you can analyze it to try and find the dealer holdback amount. Look for “DH” on the invoice with a few numbers beside it.
For example, in the screenshot below you see “DH” with “284” next to it. That is from a Mazda invoice, and that tells you that the dealer holdback is 284. A CarEdge member submitted this invoice to us for a livestream a few weeks back, and we did an entire video breaking down how to read the invoice. If you’re thinking about buying a Mazda, that video is a must watch.
On other manufacturer invoices you’ll see dealer holdback spelled out in different ways. For example on the below Toyota invoice you’ll see it explicitly says “Dealer receives a reserve of …” The dealer holdback is a portion of that reserve.
How can you leverage this in your negotiations? It’s relatively simple. Ask for the dealer to dig into their holdback a bit and give you a greater discount. There isn’t too much more to it than that. You simply need to know what to ask for to enable that discussion!
Buying a car in 2020 is a bit surreal. As a car buyer, you have many (and varied) options for where you can go to purchase a vehicle. Your options range from digital dealerships with “car vending machines” to traditional dealerships that still fill out credit applications by hand. It’s crazy to think that you could go to two car dealerships in one day and have two completely different experiences.
That being said, regardless of where you go to buy your next car, the odds are you’ll be negotiating the price of it. Even as more upstart digital car dealerships make their way into the market (Carvana, Vroom, Shift, et al), the majority of cars are still sold either via private party (on Craigslist, eBay, Facebook Marketplace, etc.) or at a dealership (franchised new car dealerships and independent local car dealerships). For you, as a car buyer, that most likely means you’ll be negotiating the price of the vehicle you’re interested in.
Many car buyers experience an awkward and uncomfortable situation when a car dealer is unwilling to negotiate. What do you do in this circumstance? After spending 43 years in the retail automotive industry, I’ve seen nearly every “sales” technique used on any unsuspecting customer, and I can assure you that even a car dealer who won’t negotiate on price, will bend even a bit to make a car deal.
What do you need to know when a car dealer won’t negotiate? Let’s dive in.
Know the current market conditions
After 43 years of selling cars for a living, I now coach, counsel, and provide recommendations to car buyers for how they should navigate their car deals. The first piece of advice I give every single person who wants to buy a car is to check their local market conditions before contacting any dealership.
What does it mean to “know the current market conditions?” It’s simple; it means you know how many vehicles in your area would satisfy your needs. My son and I built the free Market Price Report back at CarEdge to help with this.
Dealers use vAuto to track local market conditions.
Car dealers use a piece of software called vAuto to track local market conditions. What vAuto provides a dealership with is a snapshot in time of all comparable inventory within a 100-mile radius of them. Dealers look at this snapshot to determine what price they should list their inventory for sale. Feel free to ask a dealer to see their vAuto report, most will oblige and share it with you.
What does this mean for you as the car buyer? It means you need to have your equivalent report in hand before you contact any dealership. The Market Price Report from CarEdge shows you all of the comparable year, make, model, trim (YMMT) options within a 100-mile radius of your location. Best of all it shows you the negotiability score of each vehicle in that area as well.
You can use CarEdge to get access to the same information as the dealer.
If you run a Market Price Report and you find there are no similar vehicles in your area, that’s a good sign that you won’t have much (if any) leverage during your negotiations. However, if you run a Market Price Report and find that there are 100+ similar vehicles in your area then you know now you can walk away from any deal and go find another one. The best part is, the car dealer knows that too, since they’re looking at their vAuto report.
Knowing your local market conditions puts you on a level playing field with the dealer, and that’s of the utmost importance when it comes to negotiations. It’s one of your best tools to make a car dealer budge when a car dealer won’t negotiate with you.
Know how long the car you’re interested in has been on the dealer’s lot
Once you have confirmed the local market conditions, I highly recommend you get a sense for how long each dealer has had their inventory in stock. You’ll hear me call this the “time on lot,” and it’s of the utmost importance.
Why? Because car dealers do not buy their inventory in cash, instead they finance their purchase (just like you or I would). This means that for every day a piece of inventory is sitting on their lot they are paying interest on that loan. You’ll hear this referred to as “floor plan” from dealers.
If you know how long a dealer has held a vehicle on their lot, you can begin to get a sense for what their floor plan cost is on that unit. With that information, you can then negotiate more effectively. You can also pair this knowledge with the local market conditions to target your negotiation efforts on the vehicle that has been sitting on a dealer’s lot longest.
If a car dealer won’t negotiate, one of the first things you should bring up is that you know how long the car has been on their lot. This gives you tremendous leverage in the negotiation.
It’s worth noting that the Negotiability Score we provide in the CarEdge dashboard reflects this (i.e., higher scores are for vehicles that have been on dealer’s lots longer than lower scores).
Be prepared to walk and go to another dealership
With your research out of the way, you’re now ready to engage with a dealership about the particular vehicle you’re interested in. I recommend you use one of our tried and tested email templates for your initial outreach to a dealer.
If you come across a situation in which a car dealer won’t negotiate, my recommendation would be to bring up the vehicle’s time on lot and remind the dealer (politely) that it is costing them money to have the vehicle sit there, when you would gladly take it off of their hands for the right price.
If this tactic does not work, my recommendation would be to show them the similar vehicles you have identified in the area, along with their time on the lot, and let the dealer know you have many options for where you can go to purchase your next car. If this doesn’t persuade them to negotiate and make a car deal, then it’s time to send your email introduction to the next dealer on the list.
Obviously, this strategy will not work if there are no similar vehicles in your area. If that’s the case, then I’d suggest you read this guide on how to buy a car long distance from a dealer.
When it comes to negotiating tactics, whoever is in command of the conversation has the leverage during the negotiation. Car salespeople are trained to always be in control of the conversation. You need to keep them on their toes by using the above tips to gain control of the conversation.
Ultimately, the power the customer has is that they can simply say “no” and walk away. The salesperson can say no, but then they lose out on commission and a chance to make a car deal. When you say no, all you’ve lost is a little bit of time. This is the ultimate upper hand that you have when a car dealer won’t negotiate.
By following the advice in this article (and in our free cheat sheet), you’ll know how to negotiate car prices like a pro. Don’t be afraid to say no and walk away if a salesperson refuses to work with you on the price.
Would a car buying coach make this whole process easier for you? What about exclusive savings on financing, insurance, maintenance and more? Consider joining CarEdge+! We’ve got plans to suit your needs! From free basic membership, 1:1 consultations, or the whole CarEdge+ experience, let us know how we can help YOU buy your next car with confidence.
Knowing when dealers are highly motivated to sell can help you plan your car purchase around the best deals. Our team of Car Coaches has decades of combined experience, and always keeps a pulse on the auto market. There was no debating the best times to buy a car. Let’s dive in.
Is there really a “best time to buy a car?”
There are plenty of myths and claims about when you can get the best prices on cars. Many of these include specific holidays as well as certain days of the month, specific days of the year, and even exact times of the day. Some of these myths are based on observable trends in the auto industry, so let’s dig into those that hold the most merit.
For starters, it’s commonly understood that Mondays are the slowest day of the week at dealerships. So, if you’re in the market for a car and want to gain the rapt attention of a salesperson looking to make a deal or to meet a quota, consider visiting a dealership at midday on a Monday.
Another quirky fact is that shopping during poor weather can be an excellent way to get a better deal. This is because poor weather conditions generally deter customers from walking around car lots, and employees are anxious to make a sale for the day or to meet their quotas.
The key word in all of this, though…is quotas.
At the End of the Month
Dealers are assigned sales goals for each month. That means both management and sales staff at dealerships are inclined to offer better deals as their deadline approaches. So, if you visit the dealership on the last business day of the month, it gives you a bit more leverage in the negotiations.
Traditionally, January and February are difficult months for dealers, depending, of course, on other aspects of the economy. This makes it even more likely that a dealer may offer better deals for buyers during this time span. It seems too simple to be true but imagine shopping on Monday at midday during a snowstorm at the end of February. Now, you could be hitting the sweet spot!
At the End of the Quarter
Dealers aren’t the only individuals setting targets. Automotive manufacturers establish end of quarter goals for dealers which means the end of each quarter presents buyers with an opportunity to save some money. As you might expect, these quarters typically end in March, June, September, and December.
The Overall Best Time to Buy: The End of the Year
The last few days of December represent the absolute best time to buy a car because automotive manufacturers, dealers, and sales staff are highly motivated to achieve year-end sales goals. This motivation to negotiate comes from the fact that dealers get year-end bonuses from manufacturers when annual sales quotas are met.
Using a savings of at least 5% as a worthwhile objective for a customer (which can amount to a savings of over $1,100), research shows that the following holidays have been identified as some of the best days to buy a car.
Martin Luther King Jr. Day
Veteran’s Day
Thanksgiving
Black Friday
Christmas Eve
New Year’s Eve
New Year’s Day
It’s worth noting that the whole week from Christmas to New Year’s is the peak week for deals. In addition to being the holiday season, these days fall during the end-of-month, end-of-quarter, and end-of-year sales quota period for dealers, all of which can add up to great deals for car buyers.
Negotiating the Best Deal
Obviously, the best time to purchase a vehicle is when you don’t need one, but remember that your finest negotiating strategy, other than choosing the right day and best time to buy a car, is your willingness to walk away without one.
Furthermore, it’s ok to mention that you know about sales quotas set by manufacturers. It’s alright to ask how much closer the dealership wants to get to its monthly, quarterly, or annual sales goals. Tell the manager that for the right price you’re willing to help the dealership get closer to hitting those targets.
Looking for car buying help? The CarEdge Team is ready to help you save thousands, and also to avoid the stress of car buying hassles.
CarEdge Coach is your path to 1:1, personalized help with your car deal.
Prefer a DIY route? Learn more about CarEdge Data‘s unparalleled insights.
Simply want to chat with an expert? Try a CarEdge Consult anytime.
We’re here to help. Remember, learning how to negotiate will save big time!
The internet is full of guides and blog posts titled “first time car buyer tips.” A quick google search yields thousands of articles with “pro tips” for how a first time car shopper should approach the car buying process. Sadly, many of those articles are full of fluff and BS.
For many, buying a car is either the largest, or second largest purchase of their life. Regardless of if you’ve bought a dozen cars during your lifetime, or if this is your first time going through the process, it’s very intimidating. That’s why we filmed the video above (just click play to enjoy that version instead of reading), and wrote this guide, to help make sure you get the fundamentals of the car buying process done right and worry free.
We also offer Deal School, our 100% free e-course that will teach you how to go through the entire car buying process (or become a car salesperson, whichever you prefer), so be sure to check that out as well. In this article however, we’re going to focus our attention on 4 first time car buyer tips that you need to know before you go to a dealership.
Without further ado, let’s dive in!
Car buyer tip #1: Know your budget
This assumption may not hold true for everyone that reads this guide, but for 99% of you, it’s likely you are not a cash buyer. If this is your first time purchasing a car, it’s likely you’re going to finance your purchase, which makes sense, how many people have tens of thousands of dollars sitting around to plunk down on a depreciating asset?
It’s important to understand what your budget is for your first car (and for all your future vehicle purchases for that matter), and to factor in all of the costs associated with owning an automobile. For example, you will most certainly encounter salespeople that will ask you, “What’s your monthly payment goal?” And you’ll reply, “$400.”
Does that $400 include insurance, gas, maintenance costs, etc? Or are you thinking of that $400 as your budget for only the loan payment each month?
My recommendation is to set a monthly budget goal that is reflective of the total cost of ownership (including insurance, and gas). Factoring maintenance expenses can be difficult because that is entirely dependent on how frequently you drive the car.
{Bonus tip, don’t negotiate on the monthly payment. Instead focus on the OTD price. Link to calculator/blog post.}
Car buyer tip #2: Know your credit score
Did you know that annually you have free access to your credit report from each of the three major credit bureaus (Experian, TransUnion, and Equifax)? Most people aren’t aware that the federal government provides access to each report (for free) at www.annualcreditreport.com.
Before you buy your first car, be sure to know your credit score. Why? Because car dealers make a lot of money when you don’t! If you’re a first time car buyer, it’s likely you have a “thin file” (not a lot of credit history), and when a dealership runs your credit to get loan options on your behalf, don’t be surprised if they come back with outrageously high interest rates.
However, if you knew your credit score beforehand, you could be proactive and secure outside financing through a local bank or credit union and not be reliant on the high interest rate options the dealer finds for you.
It’s also important to be aware of manufacturer incentives for recent college graduates. A lot of first time car buyers are recent graduates, and car manufacturers create special incentives to appeal to that demographic. Many recent college grad programs include special financing through the manufacturer’s captive lender that allow you access to interest rates you could not have obtained elsewhere.
Familiarize yourself with these programs (and your credit score) before blindly accepting the interest rate the dealer secures on your behalf. This investment of time will certainly save you thousands of dollars over the lifetime of your loan.
Car buyer tip #3: Co-signers can help
If you have no credit history, a co-signer can help you get approved for a loan. If you have bad credit, a co-signer won’t make up for that. In the example we used above, when you have a “thin file,” a co-signer will help secure a loan with a more reasonable interest rate.
A lot of recent college graduate programs require a co-signer.
Co-signers are typically family members, such as parents, grandparents, aunts, or uncles. It’s important to understand that the co-signer is obligated to make the loan payments if you don’t. By co-signing on your loan, their purchasing power is impacted. The co-signed loan shows as an obligation for them on their credit applications in the future.
What does this mean for you? Make sure you make your car payments! The last thing you want to do is negatively impact the credit score of your family members. If they co-sign for you, they’re risking their reputation on your ability to make your payments. Please don’t take that lightly!
Car buyer tip #4: Do your homework
If you’re a recent college graduate, the concept of doing your homework should still be second nature to you. But what do I mean by “do your homework” in this context?
Focus on two things:
Study the reliability, cost of maintenance, and over all five year cost of ownership about each vehicle you’re interested in purchasing. Edmunds has good resources for that: https://www.edmunds.com/tco.html
Get a sense for the expected depreciation of the vehicle over the lifetime of ownership. CarEdge has good resources for that: https://CarEdge.com/depreciation
If you follow these 4 first time car buyer tips and complete Deal School, you’ll be in a great position to purchase your first car. Buying a car, truck, or SUV doesn’t have to be as daunting as it once seemed. Just remember, knowledge is power!
Car dealers catch a lot of flack. The annual trustworthiness of professions poll from Gallup ranks car salespeople at the bottom of the list. To suggest that car people aren’t held in high regard would be an understatement. It doesn’t help when car dealerships engage in the practice of title washing and other consumer unfriendly practices. All too often we see a story on the evening news that reminds us of why car dealers are often considered the “scum of the earth.”
Having been in the car business for 43 years, I know that not all car people are bad people. Actually (and this may come as a surprise), most car people I know are good, decent, and humane individuals (far from the characterization they receive at work). However, as with all things in life, a few bad apples can ruin the bunch, and the same holds true for car dealers.
Recently I came across a news story out of Georgia that told the journey of a fateful 2015 Toyota 4-runner that was sold 7 times over the span of 5 years in 5 different states; each time with a clean title. The kicker is, the car didn’t have side airbags in it. How could it possibly have been sold 7 times in 5 different states (each with a clean title) even though the car didn’t have side airbags? The answer: title washing.
What is title washing
Washing a vehicle title is the process of taking a total loss vehicle (when it would cost more than a car is worth to repair it) and physically moving it to another state where the title can be recognized as “clean,” instead of salvaged or branded. When a vehicle sustains severe damage, insurance companies are required to update the status of the vehicle’s title to reflect its condition, however, each state has different requirements for what must be reported, and to whom.
For example, Texas state law allows vehicles that have been in an accident to retain a clean title without proof that critical safety repairs have been fixed. In the case of our 2015 4-runner from Georgia, the side airbags had never been replaced, however the vehicle was sold with a clean Texas title at a Progressive Insurance vehicle auction. It was then transported to Georgia where it was bought and sold multiple times to unsuspecting dealers and buyers.
Title washing is unfortunately all too common in the car business. Since each state has different legal requirements for what information (and how much information) must be reported to the local government we end up with situations where nefarious people can take advantage of loopholes across state borders.
Title washing is a federal crime, however enforcement of this law is few and far between. A quick google search of “title washing crime” returns many results, but it quickly becomes clear that enforcing title washing laws across all 50 states is a task too large for any existing federal government agency. State governments are then tasked with enforcing these laws, however many are lax in their pursuit of title washers.
With one out of 44.6 cars having a washed title, the state of Mississippi has the worst title washing problem in the country. Siloed databases, different definitions of “salvage” or “branded” title, and myriad other reasons explain why Mississippi (and many other states) face major challenges from title washing.
How do you know if a vehicle’s title has been washed
The unfortunate thing about title washing is that frequently many people in the buying process have been fooled by what they thought was a clean title vehicle. For example the story of our 2015 Toyota 4-runner in Georgia was initially sold to a dealer that did not know it had previous accident history and was missing airbags.
The owner of the first dealership that sold the vehicle to a consumer ended up refunding the customer once the customer learned that the vehicle didn’t have side airbags (something their mechanic) was able to uncover.
This simply goes to show that you have to be your own advocate during the car buying process and you can’t assume that anyone is looking out for your best interests. It’s an unfortunate reality, but it’s the truth, and it’s especially true when considering the purchase of a used vehicle.
How can I protect myself
Buying a used car is a bit like gambling. You’re making a bet that the car you are buying is in good mechanical condition and won’t turn into a clunker overnight. How can you increase your odds of making a good bet? It’s easy; get a pre-purchase inspection done before buying any used car.
A pre-purchase inspection is non-negotiable when purchasing a used car. It’s unfortunate that there is no other way to protect yourself from accidentally purchasing a vehicle with a washed title, but the best thing you can do is take proactive steps to minimize the risk.
In addition to an inspection (which we really think is a must if you are purchasing a used vehicle) you can (and should) also refer to the vehicle’s Carfax or AutoCheck report. Bear in mind that Carfax and AutoCheck reports are only as accurate as the information they receive, however they may indicate that a vehicle has had a previous accident, and if it does, that can be an indication to you that the vehicle is not worth purchasing.
Another option that we strongly recommend you consider is contacting your insurance company and asking them if they have any records on the vehicle you are considering. You will need to share with them the VIN, and they should be able to provide you with even more information than the Carfax report.
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