Leasing a Car is More Costly In Post-Pandemic Year, 2023

Regular readers of this column know that I’ve always felt buying a new car was generally preferable to leasing. The main reason is that leasing is more complex than buying. The cost of a lease is based on the “lease factor” (analogous to interest rate), “residual value” (estimated value of the vehicle when the lease is over), “capitalized cost” (analogous to the purchase price), the down payment (just like the down payment when you buy), the lease term (number of months), “purchase option price” (lessor’s right to buy the lease car at end of the lease term), and the most important and obvious to the lessor, the monthly lease payment.

 
All the items listed above are not quoted or advertised to potential customers but hidden in the fine print of the advertisement. All the prospective lease customer hears from the salesman or learn from the advertisements is the monthly payment. Most of us are “payment buyers” whether we buy or lease. We a have regular income that we earn each month and monthly expenses. Balancing the income against the expenses is called budgeting. We too often fall for the trap of buying because a monthly payment will fit into our monthly budget without analyzing the consequences of the TOTAL COST of a lease or purchase. This is why car dealers can lure us in with a low monthly payment, when, in fact, their making a very large profit. Historically, dealers’ average profits on leases are about twice the profits on purchases.

 
Post pandemic, leasing has become even more costly. If you leased a car in the past 2 ½ years, you can or have, exercised your option to purchase your off-lease car thousands below the market price. Today, this advantage has disappeared because used car residuals are much higher and there is no monetary gain for you when you exercise your purchase option. Pre pandemic dealers leased about 30% of their new cars; Post pandemic this percentage has dropped to about 9%. Furthermore, with the high demand and low supply of new vehicles, manufacturers and dealers are offering no special incentives to lease. Dealers can make as much or more profit on a sale vs. a lease simply because he can charge you thousands of dollars above MSRP, but leasing companies won’t allow this when he leases you a car. Remember that the dealer “sells” your lease car to the leasing company.

 
My advice to you is ignore all car dealer and car manufacturer advertising but be especially leery of lease advertisements. I can guarantee you that you will never find a lease payment advertised that doesn’t have very large down payment hidden in the fine print.

How to Buy or Lease a New Car Confidently

Buying a car can be an exciting experience, but it can also be stressful and overwhelming. With so many different models, features, and dealerships to choose from, it can be hard to know where to start. But by following a few simple tips, you can make the process easier and more successful.

First and foremost, do your research. The most reliable and accurate source for researching the quality, reliability, safety, and value of a car is Consumer Reports. They offer detailed information on every aspect of a car, and they are completely unbiased. Take advantage of their website to research different models and make an informed decision on which vehicle is best for you.

Once you have an idea of what kind of car you want, it's time to start shopping for the best price. The internet is a great resource for this. Shopping online allows you to compare prices from dozens of dealerships and get the lowest, honest price for your chosen vehicle. You can also communicate with dealerships by phone and text, which can be useful in negotiating the price. But be careful not to visit the dealership unless you are test driving the vehicle or picking it up and paying for it. By physically going to the dealership, you risk playing on the salesman's home turf and relinquishing your control.

It's also important to shop around. Don't settle for the first dealership you find. Shop around and get as many prices as possible. The more prices you get, the lower the price you will pay. Shopping online allows you to compare prices easily and quickly, so take advantage of this resource.

However, be wary of third-party auto buying sources. While some are reliable, others allow their dealers to add thousands of dollars in hidden fees to the prices they post. Costco, TrueCar, and Consumer Reports are three exceptions that are known for their honesty and transparency.

Finally, if you finance your purchase, arrange that directly with your bank or credit union, preferably your credit union. If the company you work for doesn't have a credit union, there are numerous credit unions you can join, independent of where you work. This will help you get the best interest rate and save you money in the long run.

In conclusion, buying a car can be a daunting task, but with these tips, you can make the process easier and more successful. Research your options, shop around, and be careful when dealing with dealerships. With a little patience and diligence, you can find the car of your dreams at a price you can afford.


This article was written by an AI, ChatGPT, based on an article I wrote last year. The illustration was also made by AI, OpentArt.AI, using the prompt "confident people flying cars out of a car dealership and car salesmen are shooting laser guns at them as they escape."

The Late U.S. Senator Mike Monroney is the New Car Buyers' Best Friend

Years ago, I wrote a blog entitled "Beware the Phony Monroney". You can read it at http://oncars.blogspot.com/search?q=beware+the+phony+monroney. The factory window sticker didn't exist until 1958 when U.S. Senator Mike Monroney got a law passed by Congress, the Monroney Act. Since then, every new vehicle sold in the United States must have the manufacturer's suggested retail price (MSRP) posted on a window of the new vehicle until the retail buyer takes delivery. Before this, every car dealer could post any price they liked on the window of their cars or post no price. This created mass confusion for car buyers because every car dealer asked a different price.

I guess it falls under the category of "The Best Laid Plans of Mice and Men Often Go Awry" because the MSRP never really made much difference in every car dealer charging every customer as much as they can get away with for the same car. Dealers quickly learned how to eliminate the good intentions of Mike Monroney and the U.S. Congress. Car dealers add virtually worthless dealer-installed options, hidden junk fees, and, of course, the Market Adjustment Addendum, also known as the Phony Monroney.

If you've been buying new cars for a few years, you probably remember that the MSRP on the Monroney sticker used to be considered a very high price to pay for a car. The exception was for high-demand, low-supply cars like Chevrolet Corvettes and other exotic sports cars. The real value of the Monroney sticker, MSRP, was a true and reliable point of reference for new car buyers to negotiate the greatest discount off the MSRP.

Of course, the COVID-19 pandemic happened three years ago and disrupted the supply chains for auto manufacturers. New car inventories all but vanished, and consumer demand soared. This caused car prices to soar to all-time highs. Buying a new car flip-flopped from how big a discount below MSRP to how many thousands of dollars over MSRP.

The good news is that Mike Monroney's window sticker, the MSRP, is still the best tool for the car buyer in evaluating the lowest price. As I write this blog, new car prices can be negotiated down from way over MSRP (5-10 thousand dollars and higher) to near MSRP. Hopefully, this trend will continue, and the educated consumer will be able to negotiate prices below MSRP again.

Educated consumers know that the price they must negotiate is the out-the-door price, not the "advertised" price or the price the "car salesman" quotes you. The definition of an out-the-door price is the amount of money you pay the car dealer, allowing you to drive the car home. Only government fees paid to the state (not profit to the dealer) can be legitimately added. Sadly, dealers commonly disguise added profit as government fees by using false names like tag agency fee, electronic filing fee, and doc fee. The "acid test" for a government fee is whether the state assessed sales tax to it. A phony fee, like an electronic filing fee, will be assessed state sales tax because it's added profit for the dealer.

Don’t Play Used Car Roulette

Readers of my column and listeners of my weekly radio talk show, "Earl on Cars," (Saturdays 8-10 am EST at www.StreamEarlOnCars.com) have heard my "Mystery Shopping Reports." For 20 years, I've sent a secret shopper to different car dealerships who pretends to buy or lease a car that's advertised and reports back on the experience. Based on their experiences, dealers are listed as either "Good Dealers" or "Bad Dealers" on my website, www.EarlOnCars.com.

Last week, my shopper visited the CarMax used car lot in Royal Palm Beach, Florida. CarMax is the largest used car retailer in the US with hundreds of locations and has always been near the top of our "Good Dealer List." They have a straightforward pricing policy, pay their salespeople a salary, and offer a 7-day money-back guarantee on every car they sell, with reasonable conditions.

Recently, however, CarMax's sales and profits have plummeted, and I sent a mystery shopper to find out why. My Toyota dealership's wholesale expert told me that CarMax wasn't buying many cars at wholesale auctions, which was surprising since they're typically the largest buyer.

My shopper chose a 2021 Toyota 4-Runner advertised on CarMax's website for $40,998, which was $7,000 above the current wholesale price and $3,000 more than my dealership's retail price. The salesperson told my shopper that the vehicle had been transferred from another CarMax lot because it hadn't sold. This confirmed my suspicion that CarMax's sales and profits had decreased because they hadn't written down the cost of cars acquired during the used car bubble that had recently burst.

The microchip shortage ended, new car inventories rose, and prices dropped, causing customers to buy more new cars and fewer used cars. Dealers, including CarMax, were left with overpriced used car inventory. My dealership took a big loss and wholesaled nearly a million dollars of used cars to bring our inventory in line with market prices. Dealers who ignore overpriced inventory will struggle to retail those cars profitably. The smart move is to take the big loss quickly and replace the inventory with fresh cars at the lower, true wholesale market.

This situation means that used car buyers need to be even more cautious and shop around for prices. My shopper could have saved thousands of dollars by buying the Toyota 4-Runner at another dealership that had the sense to rid themselves of overpriced inventory.

Don’t Let Dealers Steal Your Discount on a New Car

All auto manufacturers offer price discounts and very low interest rates. As we begin the recovery from the microchip and other supply line shortages, car dealers and manufacturers inventories are growing rapidly. This will trigger more and steeper discounts to move inventory in the form of cash incentives and interest rate reductions.

 
Cash incentives take two forms, dealer, and customer. Dealer incentives, as the name suggests, are paid directly to the dealer, and are kept secret from the public. These discounts range from a few hundred to a few thousand dollars. Depending on how large an inventory of a particular model is, dealer and customer incentives can range from several hundred to several thousand dollars. Discounts of $10,000 and higher are not uncommon.

 
Customer cash incentives are advertised by the manufacturer to the public. For all intents and purposes, these customer incentives may as well be secret. Car shoppers and buyers rarely buy cars because they know of advertised manufacturer’s discounts. A big reason for this is that dealers’ advertised prices already includes the manufacturer’s advertised incentives. In effect, the dealer is taking your discount for himself and then “discounting” the car in his advertised price. When you buy the car, one of the many papers you will blindly sign in the “business office” is assigning your manufacturers discount to the dealer. By making your discount part of his advertised price, the dealer has secretly converted your discount to his profit.

 
Manufacturer discounts are paid directly to the dealer and are kicked back to the dealer after he sells you the car. These “kick-backs” are in addition to the routine kick-backs such as advertising money, 2% or 3% holdback, interest rebates, quota rebates, etc. The “invoice” that the manufacturer sends dealers for every car they buy are loaded with thousands of dollars in hidden profit for the dealer. You’re supposed to believe the invoice is the “true cost” of the car. In normal times the average car’s “invoice” includes thousands of dollars in hidden profit to the dealer.

 
Interest rates are rising rapidly, and manufacturers are offering subsidized, lower interest rates to attract buyers. Sadly, the average buyer is unaware of these available low interest rates because the dealer won’t tell the customer. The reason is that manufacturers offer a cash discount OR the low interest rate, leaving the choice to the customer. The dealer makes the choice of cash without informing the customer so that he can convert the discount into his profit.

 
You can avoid being taken advantage of by going to the manufacturer’s website after you choose the specific year-make-model car you will buy. This will tell you what customer discounts are available from the manufacturer and what low interest rates.

It’s Time to Begin The Car-Buying Process

Please note that my headline doesn’t read that “It’s time to buy a car”; It’s time to begin the process. All indicators are that the microchip shortage and other supply line issues over the last three years are past. Auto production is geared and gearing up to where we were before the pandemic. Dealers’ inventories are growing, and prices are coming down. Dealers’ bad behavior is even beginning to mitigate. This resulted from the price gouging and deceitful advertising and sales practices during the past 3 years that brought on aggressive retaliation by the Federal Trade Commission and some local regulators.

 
The car buying process will take some time, weeks, at least. Time is on your side because car prices will continue to come down for months, even up to a year. Inflation is coming down, interest rates are not going much higher, and soon increasing supply will more than catch up with demand. Here are the “bases that you should touch” before you sign on the dotted line: 

• Study Consumer Reports online or magazine. You don’t even have to join or subscribe. Your local library provides both hard copies and online Consumer Reports. Be sure you check the annual auto issue, and most issues carry reports on all cars, new and used. CR evaluates cars from every angle…safety, reliability, cost of maintenance and repairs, fuel economy, handling, comfort, and price. CR is the only totally trustworthy source of information on cars. Unlike every other car information source, like Edmunds, Kelly Blue Book, Cars.com, J.D. Power, CarFax, Motor Trend, car and Driver, etc., Consumer Reports has NO FINANCIAL AFFILIATION with car dealers or manufacturers. CR accepts no money from anyone except consumers’ donations. When they test a car, they pay full price from a car dealership. 

• Shop online, not at dealerships, after you’ve made your choice. When you enter a dealership, the salesman and sales manager are in control. You’re playing on their home field. Salespeople and managers are trained on taking control of the negotiation. They attend classes on sales techniques that work best when they’re face to face with the customer. You can insulate yourself from car salespeople by using a different email address than you normal one. You can also not give them your real phone number. 

• Select the dealership that gives you the best OUT-THE-DOOR price. The true definition of an out-the-door price is one with only the government fees of sales tax and tag added.

• Shop your trade in with, at least, three different sources such as CarMax, Carvanna, WeBuyAnyCar.com, Vroom, and dealers that sell the brand of your trade in. Don’t accept only the trade-in allowance offered by the dealer you buy from. 

• Arrange your financing in advance with your bank or credit union. Credit Unions have much lower interest rates than banks. If you’re not a member of a credit union, it’s worth the small annual fee to join.
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• Ignore after sale products offered by the dealer. If you buy a good car, you don’t need an extended maintenance plan. Road Hazzard insurance, emergency brake down insurance, etc. are typically overpriced and can be purchased elsewhere, like AAA, for much less.

2023 New Year’s Resolutions For Car Dealers

Car dealers are running out of time to radically change the way they retail their new and used cars, as well as their service and parts. Car dealerships have been “frozen in time” for about a century in the deceptive way they sell cars. You must have realized this when you bought your last car. The out-the-door price you paid was much higher than the advertised price, and you paid a different price for the same car that others paid a higher or lower one. If you financed your car through the dealer, your finance costs were considerably higher than your bank or credit union would have charged.

 
Why do I say car dealers are “running out of time”? The answer is the KNOWLEDGE EXPLOSION, occurring for the first time in human history. My father was born in 1892 and in 1900 human knowledge doubled about every 100 years. Car dealers came into existence in the early 1900’s after Henry Ford invented the Model A Ford and assembly line production. By the end of 1945 human knowledge was doubling every 25 years. In the 21st century we witnessed some scientific breakthroughs that have turbocharged human knowledge. This began with the Internet which sparked the digital age bringing Google, quantum computing, the Cloud, and the 800 lb. gorilla, ARTIFICAL INTELLIGENCE, A.I. Today human knowledge is doubling about every 13 months and very shortly will be doubling every 12 hours.

 
What all this means is that all humans, including car buyers, are immensely smarter, with instant access to more knowledge than anyone could have imagined a few years ago. Not only are car buyers a lot smarter, but so are the politicians, and voters. Up until now, lack of consumer awareness of car dealers’ deception has allowed regulators and legislators to permit car dealers to “run amuck”. Auto manufacturers and dealers have had politicians and regulators “in their pockets” for a long time. Without the support of Big Auto, a politician can’t get elected. The new voter, benefiting from the knowledge explosion, will no longer elect politicians that “play ball” with car dealers and manufacturers. In fact, the new voter will elect politicians who will “play ball” with them, the car buyers. To get elected, politicians will have to convince the voters that they will “come down” on crooked car dealers, enforce the consumer protection laws already on the books, and add more if needed.

 
Here are my recommendation for car dealers who would like to remain in business in the 21st century by being able to sell cars to the new fully informed car buyer.

Car Dealer 2023 New Year’s Resolutions

Advertise and post the price online that you’ll sell your cars for, no more or no less. Every other retailer has already learned this lesson.

 

Eliminate all fine print that secretly increases the advertised price (like a large down payment). Manufacturers as well as dealers are guilty of this. Both violate Federal Trade Commission rules when they do.

 

Do not advertise that you have cars in your inventory that you do not. Cars that you ordered from your manufacturer can take months to arrive.

 

Do not add options and accessories to your cars unless you include the cost of those in your advertised price.

 

Do not add hidden charges, often called dealer fees or junk fees, to your advertised prices. These charges are, in truth, additional profit to you. All costs should be included in your advertised and posted prices. Federal, state, and local government fees are the only exception…sales tax and license plate.

 

Inform your customer that your dealership makes a profit when it finances new and used vehicles. This profit averages about $2,000 for every car sold and derives from interest rate markup and “products/services” like GAP insurance, extended warranties/service contracts, prepaid maintenance, road hazard and roadside assistance. Car buyers should be informed that they should compare financing from their bank or credit union.

 
The average car dealer reading these resolutions will either laugh in disbelief at my naivety, because he doesn’t believe my basic premise; or he’ll be horrified at what adhering to such changes would do to his profits (GIGANTIC at the present time). Here’s something I wish each dealer would consider. Because most dealer will ignore my suggestions, you can be one of the few that actually prospers because you will be the choice of the new, 21st century, fully informed and aware car buyer. He'll bypass your competition to buy a car from you because he understands and trusts the way you do business. If you disagree, check out my Toyota dealership in North Palm Beach, Florida where “the educated consumer is my best customer”.