Monday, January 18, 2016
Leasing is the Dealer’s Choice For Bait and Switch Advertising
Car dealers and auto manufacturers prefer leasing you a car to selling you one because it’s more profitable to both of them. It’s more profitable to the manufacturer because they have the control over someone to whom they lease that they don’t with a purchaser. Usually the manufacturer’s financing division owns the car you drive, not you and and you must return their car at the end of the lease. Forcing you to go back to the dealer gives them a much better chance of leasing or selling you another car. Dealers love this but, even more, they love the fact that they make about 50% more profit on a lease than a purchase. They can do this because a lease transaction is far more complex than a purchase. With leasing, the focus is on the monthly payment, not the things that actually determine the profit to the dealer like capitalized cost, residual, term or money factor. Most people who lease cars don’t even understand the meanings of this terminology, much less how their low monthly payment is calculated.
If you read my last blog, “Earl Stewart’s Business Ethical Dilemma”, you know about the trend for manufacturers to mandate a minimum price that their dealers are allowed to advertise. Honda was the first to do this, Mazda followed, and Toyota joined them this month. Honda, Mazda, and Toyota dealers who are inclined toward “lowball bait and switch” advertising may now find it more difficult to do on the majority of the car that they sell. If you don’t already know, bait and switch advertising means advertising a product at a price so low (the “bait”) that potential buyers are compelled to respond. These prices are so low, often below actual cost that the dealer does not want to (or will not) sell you the car at the advertised price. He “switches” you to another car that he can make a profit on or he adds hundreds or thousands of dollars unwanted equipment and fees to the advertised price.
This is the very reason that these manufacturers established a minimum price that car dealers are not permitted to advertise below. Clearly, with the best intentions, the manufacturers are trying to put a stop to bait and switch advertising. But as an unintended consequence, this will compel even more dealers to advertise lease payments. A car dealer can advertise as low a lease payment as he wants and still make a big profit as long as he adjusts the “capitalized cost reduction”, “lease factor” and/or term to his liking. The capitalized cost reduction is “lease-speak” for down payment, the money factor is “lease-speak” for interest rate and the term is the number of months of the lease.
Not only don’t most people who lease understand “cap cost reduction” and “money factor” but this information is concealed in the fine print. The prospective lease customer that comes into the dealership to lease that new Honda for $199 per month could not read the fine print requiring a $5,000 capitalized cost reduction (read “down payment”). Without that large down payment the real payment is $399 per month. The payment can also be manipulated by adjusting the term of the lease and the allowable miles or by not being clear about the total cash out-of-pocket required at signing.
You would think that there are regulations preventing advertisers from hiding material information affecting the true lease payment of a car in the fine print and you’d be right. The Federal Trade Commission has such regulations but they are rarely enforced. State and local regulators almost never enforce such FTC rules. The essence of the FTC law is that anything in an advertisement that materially affects the price or payment must be “clearly and conspicuously” shown.
You can test the FTC’s Clear and Conspicuous Standard with these questions:
• Prominence: Is the fine print big enough for people to notice and read?
• Presentation: Is the wording and format easy for people to understand?
• Placement: Is the fine print where people will look?
• Proximity: Is the fine print near the claim it qualifies?
The next time you see a car dealers TV advertisement, try to read the fine print. It’s flashed on the screen for such a short period of time you might not even realize that there was fine print. Fine print in almost all TV ads is practically impossible to read. The same is true with radio “audible fine print” and most newspaper or Internet fine print.
My advice to you is to be leery of all car dealer ads but be especially leery of leasing ads. If you cannot find the capitalized cost reduction, lease factor, and the term in the advertisement, then the advertised payment is absolutely meaningless and certainly much higher than advertised. If you see an advertisement that violates FTC regulations, click on this website, www.FloridaCarDealerComplaints.com. You can download a complaint form from the Florida State Attorney General’s Office, Florida Department of Motor Vehicles, and the Florida Office of Consumer Affairs.