Tag Archives: dealer add-ons
Dealer holdback is a percentage of the price of a new car, typically 2-3% of MSRP, that is returned to a dealer from the manufacturer after a car is sold. This money is typically used to help dealers pay for finance charges they have accrued while keeping unsold cars on their lot. This is a “refund” of money to the dealer for what they originally paid to buy the car from the manufacturer.
Read about other car financing terms in this other car terms glossary.
How Does Dealer Holdback Work?
Although you'd assume that car dealers make a small fortune every time they sell a new car, that’s not always the case. In fact, there are a lot of costs associated with selling you that car, and that can leave the dealer with little to no profit at the end of the day.
Typically, car dealers will finance their inventory through something called a Floor Plan. When they order a car from the factory, the finance company covers the invoice price, and the dealer pays a certain amount of interest for every day that the vehicle remains in inventory. Once the car sells, the dealer pays off the loan, and the car gets replaced.
As you would expect, the dealer can make more money by selling the vehicle faster (since he’s not paying as much interest). To do this, many dealers will hold one of those “invoice” sales, where a car will seemingly be sold for the dealer’s cost. But there’s a little more to it than that.
To bolster the dealer’s bottom line, manufacturers instituted something called “dealer holdback”. This is a percentage of a vehicle’s price that gets returned to the dealer several times a year (usually quarterly). When determining the invoice price, the dealer holdback is generally included in the price. The purpose of the dealer holdback is to offset the interest paid by the dealer to finance his inventory. This ‘holdback’ is usually capped at 2-3% of the vehicle’s invoice price.
Since the dealer can keep more of that money if he doesn’t have to pay 2 months-worth of interest, those $1 over/under invoice sales have become quite popular. They not only allow the dealer to move their inventory faster, but their salesperson’s commission is also capped at the invoice price of the car. Leaving more of the holdback to be counted as profit.
Is Dealer Holdback Negotiable?
Since it is basically the dealer's own money, they are often not thrilled with the idea of passing this money along to the consumer.
When negotiating the price of your new car, the dealer holdback will almost never be up for discussion. This is the dealer’s fall-back profit, and many times, it will just cover the floor plan interest and the salesman’s commission.
If there actually is a dealer holdback, the salesman won’t be able to tell you the amount. Their commission is based on the “gross profit”, so the only ones to know the amount of the holdback will be the sales manager and upper management. Since the dealer holdback is paid out by the manufacturer, just let the dealer have this money.
Dealer Holdback by Manufacturer
The holdback amount varies from manufacturer to manufacturer and may vary from what’s shown below. Here’s a current breakdown for each manufacturer:
|Car Manufacturer||Dealer Holdback||How is Holdback Calculated|
|Acura||2%||off base MSRP|
|Buick||3%||off total MSRP|
|Cadillac||3%||off total MSRP|
|Chevrolet||3%||off total MSRP|
|Chrysler||3%||off total MSRP|
|Dodge||3%||off total MSRP|
|Fiat||3%||off total MSRP|
|Ford||3%||off total MSRP|
|GMC||3%||off total MSRP|
|Honda||2%||off base MSRP|
|Hyundai||3%||off total MSRP|
|Infiniti||1.50%||off base MSRP|
|Jeep||3%||off total MSRP|
|Kia||3%||off base MSRP|
|Lexus||2%||off base MSRP|
|Mazda||1%||off base MSRP|
|Mercedes Benz||1%||off base MSRP|
|Mercury||3%||off total MSRP|
|Mitsubishi||2%||off base MSRP|
|Nissan||2%||off total invoice|
|Ram||3%||off total MSRP|
|Smart||3%||off total MSRP|
|Subaru||2%||off total MSRP|
|Toyota||2%||off base MSRP|
|Volkswagen||2%||off base MSRP|
|Volvo||1%||off base MSRP|
So you've learned how to negotiate a new car and think that guarantees you a good deal. Well think again! Did you know a majority of a car dealer's profit comes from add-ons in the Finance Office?
Dealerships want you to think the hard part is over and that it's time to let your guard down. But as you're getting ready to sign for your new car, the Finance Manager will smoothly convince you that you need expensive add-ons and accessories.
What are Dealer Added Options?
A dealer added option is any accessory that a car dealer installs on a vehicle after they receive it from the manufacturer. Examples include items such as floor mats, cargo covers, roof racks, VIN etching, and pin striping. The prices of these items are not listed on the car’s MSRP sticker, but instead a dealer will typically add a second “addendum” window sticker.
Dealers add these items because they have high profit margins and most people don’t try to negotiate them!
Average Car Dealer Profit for Add-on's (Infographic)
The image below shows how much the Finance Department really makes off everything they sell you. Note: these high numbers aren't even the total price you pay, they only represent dealer profit!
But not to worry, you don't really need most of these items. Here's a breakdown of what these items really cost the dealer and what you can do to save yourself money. When in doubt, google a specific option and see if it’s recommended or available outside the dealership at a lower price.
Common Dealer Add-ons & Accessories
Item Cost to Dealer Retail Price Dealer Profit Suggested Action
Fabric protection (scotch guarding) $5 $300 $295 Not necessary. If you want it, buy Scotch Gard for 9 bucks and apply yourself.
Paint protection $10 $325 $315 Not necessary. If you want it, buy sealant or wax for 15 bucks and apply it yourself.
Undercoating $200 $700 $500 Don't get it, most new cars come with warranties against rust and corrosion.
Rustproofing $50 $800 $750 Don't get it, most new cars come with warranties against rust and corrosion.
Pin striping $30 $300 $270 Not necessary. If you want it, look for an independent shop to do it after you buy.
Car alarm $300 $800 $500 Consider this, but it will be marked up significantly at the dealership. Go to an independent dealer and save money.
VIN etching $75 $200 $125 Not necessary. If you want it, buy a window etching kit and do it yourself for 20 bucks.
Lojack $325 $800 $475 Consider this, but get prices from an independent installer first.
Extended warranty $800 $1,800 $1,000 Not necessary, but can come in handy. Don't buy at the dealership without shopping around first. Read how to evaluate an extended warranty.
Gap insurance $200 $500 $300 Not necessary, but get competitive quotes outside the dealership if you are going to buy it. Read more about gap insurance.
Financing $0 n/a a lot! Dealers typically add 2-2.5% in APR to loans they provide. Find your own financing before heading to dealer. Ask if they can beat it.
Negotiating Dealer Add-Ons
Many of the add-ons you will be offered are unnecessary or can be purchased outside the dealership at a significantly lower price. There are two main tips for negotiating add-ons:
- You probably don’t need it, so don’t buy it.
If an item is not factory installed as part of an options package the dealer may be able to remove it from the deal. Consider whether you really need it, or if can you buy it elsewhere. In the majority of cases, if the item is optional then say NO.
- Negotiate the whole car deal, not individual items
Follow the advice on my website and get car prices from several dealers. Make sure each dealer gives you a total price that includes all options and add-ons. You should be able to find similarly equipped vehicles and then you can ask dealers to give you their best overall price (including add-ons) to win your business.