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Dealer Holdback: What is it, exactly?

Apr 5, 2008
Holdback is money that an auto manufacturer pays a dealership to stock their inventory.

You're probably wondering why a dealership needs to be paid to stock inventory. After all, if the dealer wants to sell cars, don't they need cars on the lot? Why do they need to be paid for that?

Because most dealerships will need to borrow the money to stock their lot with cars. For example, let's say that a dealership has about 200 cars on their lot. Since cars cost an average of about $25,000, this would equal approximately $5 million worth of inventory. Just as most businesses need to borrow money to pay for inventory, car dealerships do the same because they don't have the kind of cash flow it would take to stock their lot with cars.

The interest on borrowing $5 million dollars results in some expensive interest payments. These interest payments are called "floorplan" and will add up to lot of money in no time at all. The interest on each vehicle in a dealer's inventory will be anywhere between $3 and $20 a day, depending on the interest rate. Added up, it is very expensive to stock inventory. In today's auto business, many dealers can not afford such an expense and, if not for holdback, they would decide not to stock very many vehicles. This in turn would probably reduce sales.

Manufacturers have always been eager to sell as many cars as possible. If the dealers sell more, then the manufacturers will too. About thirty or forty years ago, manufacturers came up with "floorplan assistance" to help dealers stock their lots with more new cars. Presently, manufacturers pay 2-3% of the price of each vehicle to dealers to offset inventory costs, all in a drive to maximize sales.

For many dealers, holdback is a necessary part of their income. However, you'll also find dealers with such high turnaround that holdback is a type of profit for them - they actually make money on the interest subsidy because they're able to sell all their inventory very quickly. Having said that, it's very difficult to expect a dealer to share any of their profit from holdback with you. Most dealers are already operating with a pretty thin profit margin, and they feel like the holdback money belongs to them. Besides, most customers don't know about holdback or ask for it.

When you want to get the best deal on a car, remember to find multiple quotes online. You might be able to convince a dealer to sell a vehicle at less than invoice if they really want to "earn your business." They won't make a profit selling it below invoice price, but they still have the holdback money. Of course, if you pay less than invoice, you will get a vehicle at a bargain price.
About the Author
Author Jason Lancaster, an auto industry veteran, created AccurateAutoAdvice.com. You'll find accurate advice on new car negotiation tips and dealer hold back.
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