What Is the Dealer's Holdback? (Car Buying Tips)

The dealer’s holdback (also known as a “pack”) is another widely-used arrangement that is unknown to most people. Some people may consider the holdback a matter of accounting trickery, but this is the way it works. Manufacturers may inflate the invoice price of the vehicle (usually by about 2% to 3% of the invoice price or the MSRP). It will later return this money to the dealer in the form of a quarterly check (usually every 90 days). This is more or less a forced savings account that the manufacturer is imposing on the dealership.

Dealers must maintain large inventories. They therefore must finance a great number of cars in order to purchase them from the manufacturer. The manufacturer in turn helps the dealers to pay the interest charges for up to the first 90 days by using the money that was originally held back (the holdback money). If the dealer sells the car immediately upon receiving it in inventory, it will be eligible to be refunded all of the holdback money on that vehicle. If the dealer sells the vehicle in 45 days, it will be eligible for half the holdback money. If the vehicle is still sitting on the lot in 90 days (this is fairly rare), then the dealer will get none of the holdback money because all of it went towards paying the interest.

You may wonder why they bother raising the price to refund it later. If you think about this from the dealer’s point of view, you will see some great reasons:

1. It increases the invoice price. If a customer tries to negotiate from the invoice price, then the negotiations will start from a higher number and the dealer will therefore make more money.
2. By increasing the invoice price, the dealer will need to finance its inventory based on a higher price and therefore attain more funding through its creditors for its inventory.
3. By increasing the invoice price, dealers ultimately will pay less in commissions to its salespeople because it reduces the profit on a sale. Commissions are usually calculated as a percentage of profits (selling price – invoice price).
4. Holdback money allows the dealers to sell at or near invoice and still make a profit. This allows dealers to hold and profit from the $1 over or under invoice sales.
5. The dealer gets some of the holdback money refunded, so for the reasons above, the holdback money helped the dealer not to lose as much money as it would without it.

Taken from The Car Buying Bible, a 162-page car buying guide which features car buying tips and car loan calculators. Written by a former car salesman, college math instructor and health insurance analyst.