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Dealer Holdback Explained

Auto manufacturers pay dealerships money to stock their inventory. This is called holdback. Why a does a dealership need to be paid to stock inventory, you may ask? The dealer needs to have cars on their lot in order to sell cars, so why should they be paid for something they need to do anways? 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.

About thirty or forty years ago, manufacturers decided to start paying dealers "floorplan assistance" so that they could stock more cars. They figured that stocking the lots help dealers sell more cars, and in effect allows manufacturers to sell more cars. Currently, dealers get back 2-3% of the cost of each vehicle from the manufacturer when they sell a car to offset the cost of their inventory. This rebate of 2-3% is known as "holdback." Holdback is an essential part of income for most dealers. There are some dealers, however, with such high turnaround that holdback becomes profit for them.

That is, they actually make a profit from the interest subsidy because they sell their inventory so fast. When this does happen, you shouldn't expect that a dealer will share any of their holdback profit with you. Since most dealers are already operating with a small profit margin, they feel that any profit from holdback is theirs. Most customers don't ask for or even know about holdback anyway. Be sure to follow our standard advice on car negotiating if you are trying to get a good deal: go online and get several quotes. If there is a car you are thinking about buying that the dealer really wants to sell, you may be able to buy it for less than invoice.

They will still have the money from holdback even if they don't make a profit, and you will get a vehicle at an excellent price.

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

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