Sign the Petition!

Monday, June 22, 2015

Don't Get "Flipped" to a Lease

One of the most popular weapons in car dealers’ arsenals is the infamous “lease flip”. This is car dealer jargon for switching a customer who originally intended to buy a car to leasing the car. 

Of course the motivation to do this is more profit for the dealer and a bigger commission to the salesman. That’s not to say that leasing a car is always more costly than buying one, but it can be if you’re not careful. And not being careful is exactly what happens when a purchase intender becomes a lessee. 

Here’s how it happens. You come into the dealership to buy a car. You may have seen the dealer’s advertisement in the newspaper or TV for a particular model. More than likely you are prepared to make a down payment and/or trade in your old vehicle. You have a monthly payment in mind because almost everybody has a budget and we usually translate most purchases into whether or not we can fit them into our monthly budgets. You negotiate the best price you can to buy the car, or maybe the sale price is good enough. 

Now the salesman or more often the F&I manager/business manager tells you what your monthly payment will be. Let’s say that you have a trade-in worth $15,000 and aren’t going to put any cash down. The F&I [Finance and Insurance] manager tells you your monthly payment will be $427 per month. But that’s way more than you can afford and you tell him you can’t buy the car because you can’t afford that big a payment. He asks you how much you can afford and you tell him it must be under $350 per month. Now he has you set up perfectly for the “lease flip”. 

“Mrs. Smith, I think I have just the right thing for you. What would you say if I told you that you can drive that new car home today for just $349 per month?” You say, “With glee, you say we have a deal!” Guess what? You’ve just been flipped. If you had bought the car at the advertised price or negotiated a very good price, the dealer probably would have made about $1,000 profit. and the salesman would have made about a $200 commission. Not that you’ve let yourself be flipped to lease, the dealer could be making $15,000 and the salesman could be making a $3,000 commission!

I’m not exaggerating. I get calls weekly from victims of lease flips. Many of the callers are elderly and many of them are widows who never bought a car before, but had relied on their husbands. There’s no law that limits the profit that a dealer can make when he sells or leases a car. $10,000, $15,000, and even $20,000 profits are made and usually on leases. The dealers can do this by using the trade-in as a capital cost reduction on the lease but allowing less for the trade than it is actually worth. In the example above, your trade-in may be worth $15,000 but you were allowed only $5,000 to reduce the capitalized costs of the lease. Also, the dealer could have raised the price of the car you negotiated or the sale price to MSRP or even 110% of MSRP which is allowable by the leasing companies. 

By manipulating the number of months of the lease and the down payment [capitalized cost reduction], a dealer can give you as low a payment as you ask for and still make an exorbitant profit. Most buyers are so focused on monthly payments that they don’t carefully analyze what they are agreeing to and signing. The shorter the number of months of a lease, the greater impact the down payment has on the monthly payment. A $5,000 down payment reduces the monthly payment on a 36 month lease by $139 per month, $208 on a 24 month lease, and $417 on 12 month lease. 

Incredibly many victims of the lease flip, never thought about the fact that after the 12, 24, or 36 month term of the lease, they own nothing. After 36 months, a car with a good resale value should be worth about half of what you paid for it. Many people who have never leased before think they can bring their lease car back early if they want. Leasing is not renting and you can bring your car back early only if you make all of the remaining lease payments. If you had bought the car for $30,000 and financed it for 36 months, you would have about $15,000 in equity at the end of 36 months and no monthly payments. You were building equity with every monthly payment in the purchase but you were building zero equity with your 36 lease payments. 

As I said before, don’t let this frighten you from ever leasing a car. Leasing can be a good choice and sometimes the best choice. You can find six articles I’ve written for Hometown News: “Lease a New Car before You Buy It”, “Car Leasing Booby Traps”, “Be Very Careful When Leasing a Car”, “The Lease Acquisition Fee…the Bank’s Gotcha”, “Buy or Lease Your Car at the Right Time of Year”, and “Should I Buy or Lease My Next Car?” 

3 comments:

  1. Earl, just wondering are you against making a profit? What in your opinion is a "fair" profit for you to make on a car deal? Do you tell your customers how much profit you are making on every deal? And yes I am in the business if you couldn't already tell, I do like your blogs I just wonder sometime that if you allow your sales people to make a good living by earning a profit? Please don't take this as I am all for cheating and deceiving customers to make exuberant profits just honestly want your feed back on this.
    ~DC AutoSalesguy

    ReplyDelete
  2. I've been around the automotive industry in various capacities on both the manufacturer and retail side for 30 years, and although Mr. Stewart makes some good points, his comment about a dealer making $10,000-20,000 in profit on a lease vehicle is outlandish. It can be true that a dealer may make more money on a lease, but NEVER to the degree that Mr. Stewart suggests. Suggesting that a dealer can boost their profitability 10 to 20 times through leasing is flat out incorrect. Having said that, customers should verify what the lease acquisition cost is, which is the price they are "paying" for the vehicle through the lease. Never just focus on the payment.

    ReplyDelete
  3. Dear anonymous, what can I say. YOU ARE DEAD WRONG about dealers not making $10,000-$20,000 profits on leases. This fact is actually a matter of public record in a lawsuit filed in Martin County against Toyota of Stuart. About 12 elderly plaintiffs were represented by a local lawyer whose name escapes me at this moment. The lawyer called me to consult with him in this case. The issue was not making an obscene profit on elderly customers, but the deception that was involved. The salesman lied to the customers saying that the lease cars could be returned like they were a rental. They also took the trade-ins without any credit toward the capitalized costs. If you would like to call me on my cell phone, I will be happy to give you the details so that you can verify for yourself that what I wrote in my blog is the truth...561 358-1474.

    ReplyDelete

Earl Stewart On Cars welcomes comments from everyone - supporters and critics alike. We'd like to keep the language and content "PG Rated" so please refrain from vulgarity and inappropriate language. We will delete any comment that violates these guidelines. Oh yeah - one more thing: no commercials! Other than that, comment-away!