You may have seen ads lately that advertise a new car or lease below dealer invoice or just a buck above it. While these deals may seem too good to be true, they actually aren’t, just as you suspected. The reason the dealership can offer you prices so close to “cost” is because of hidden incentives paid to the dealership when they sell or finance their vehicles.
First off, the dealer invoice isn’t really the true cost of the vehicle. Sure it’s what they may have paid, but once they lease or sell the car, they get nice little kickbacks (typically paid quarterly), so they actually have more room to negotiate than you may think. Clearly they aren’t selling or leasing cars at a loss, don’t believe the hype.
One such rebate is called a “dealer holdback,” which is essentially a percentage of the vehicle’s MSRP, paid back to the dealer by the manufacturer once the car is sold or financed. It varies between 2-3%, though not all manufacturers offer it. Check out this useful list to see who offers it and who doesn’t, and at what rate.
The dealer holdback is used to finance the vehicles the dealership keeps in stock, and once sold, that money is released back to the dealer. The fee isn’t disclosed to the consumer, but it is included in the dealer invoice. Because dealers pay for the cars upfront, manufacturers give them a helping hand by essentially financing the vehicles for the first 90 days they sit on the lot.
The quicker the dealership moves inventory, the more of that holdback they get to keep. Typically, if the car is leased or sold within 30 days of arrival, the full holdback is refunded to the dealer. It then decreases each month until after 90 days the holdback is essentially exhausted.
If sold within the first month, the dealer can rake in hundreds or even thousands of dollars in extra profits, making that sale at invoice a lot sweeter than the salesman may make it out to be. However, if the car remains on the lot for more than 90 days, it cuts into the dealership’s profit.
Now, how can you use the knowledge of the dealer holdback to your advantage? Well, most experts agree that you shouldn’t bring it up explicitly, as it seems to be a no-no with dealers because it’s their entitlement. However, armed with the knowledge of this rebate, you know that making an offer to lease a car at below dealer invoice is fair, because you know they’re still making money on the deal. That’s really the importance of the dealer holdback in a nutshell. Just another weapon of mass negotiation at your disposal.
Tip: High volume car dealerships typically receive more incentives (bigger profits) from car manufacturers, so there may be more room to haggle.