Tag Archives: dealer add-ons
Are you trying to understand holdback and other car financing terms? Here's an overview of holdback.
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 Mr. 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 Mr. 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.
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. The holdback amount also varies from car company to car company. And some (particularly European brands) don’t even offer their dealers a holdback.
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.
So you've learned how to buy a car at the best possible price and think that guarantees you a good deal. Well think again! Did you know that a majority of a car dealer's profit comes from the Finance Office (or F&I Department)?
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 extras.
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!
Average Car Dealer Profit for Add-on's & Extras
Breakdown of Add-ons & Extras in the F&I Dept.
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.