I just received a letter and a follow-up phone call from an attorney who is representing a large group of buyers from one dealership who he is alleging was taken advantage of by a South Florida car dealer. He and his clients are readers of my column and he was asking my advice. All of these buyers are elderly. In fact, two have passed away since the lawsuit was filed. These buyers paid huge profits to this dealer, thousands of dollars more than an average profit on a new car which is typically under $2,000. These senior citizens came in to buy a car, but salesmen convinced them that leasing was a better option because they put so few miles on their cars (This is not true). This lawyer told me that, when he confronted the owner of the dealership, he admitted to making exorbitant profits on his clients and said, “It’s all legal and there is nothing you can do about it!”
It’s true that, when we get older, we drive less and put fewer miles on our cars. But that is not a good reason to lease a car instead of buy one. A car with fewer miles is worth more than one with a lot of miles, all things being equal. You have an advantage trading in a car that you own with low mileage. You will get a better trade-in allowance on your next purchase or you can sell it for more with low miles. In fact, you actually have a bigger advantage if you own a car with extraordinarily low miles. Leasing companies typically allow 10,000 or more miles per year, after which they add charge for each mile you have above that. If you put less than 10,000 miles per year on your car, they don’t “pay” you any money per mile. This lower mileage advantage goes to the leasing company.
After this dealer had given these customers a false reason convincing them they should lease instead of buy, he proceeded to get as much cash from these customers as he could squeeze out of them. If they were trading in a car, he undervalued the appraisal. He commanded large down payments (down payments are not normally necessary when leasing) with the excuse of “getting their payments down to what they could afford”. Remember that these customers came into the dealership with the mindset of buying, not leasing. They were prepared to make down payments, which are usually necessary on a purchase. They also had monthly payments in mind, based on purchasing. When you make a down payment on a lease and end up with a payment of about the same amount as if you purchased the car, you are paying the dealer a HUGE profit. After making a down payment and all of your monthly payments on a purchase, you own the vehicle. After making a similar down payment and similar monthly payments on a lease, you own nothing. What would have been equity in your car of thousands of dollars if you had purchased, was converted to profit for the dealer because you leased.
Don’t get me wrong, leasing is a viable alternative to buying but you must carefully analyze each option before you commit to one or the other. The best way to lease a car is to “buy it first”. I don’t mean that literally. But you should get your very best selling price on a car even if you would rather lease it. In past columns, I have told you how to get your best price. Decide first on the exact make, year, model, and equipment you want. Then, comparing “apples and apples”, get prices from at least three dealerships. Also, your Internet price is usually the lowest price. Don’t be fooled by “dealer fees”. Be sure you get an “out-the-door” price plug tax and tag only. Separate the shopping of the price on the car from your trade-in. Get at least three bids from other dealers of the same make to buy your trade-in. Offer the dealer you choose to buy your new car from the right of first refusal.
Now you have selected the dealer with the best price. Tell the dealer that you have changed your mind. You want to lease the car, not buy it. Tell him that you know that, when he calculates your lease payment, he should use your quoted price as the “capitalized cost” on the lease. This is the sum which, when applying the lease factor (interest rate) and residual value (what the lease car is estimated to be worth at the end of the lease), gives you your monthly payment. All lease companies also add something called a “lease acquisition fee”, as much as $800. This is just like a “dealer fee” and is profit for the leasing company and usually the dealer gets a piece of it. You may be able to negotiate that down, at least the dealer’s part of the profit. Now, tell him how many miles you typically drive and, if its more than the leasing company allows, include that extra cost into the lease so that you have no “surprises” at the end of the lease. Be sure that the dealer gets payments from several leasing companies. Different leasing companies offer different lease factors and sometimes different residuals. Your capitalized cost will remain constant, but you will choose the lease company with the highest residual and lowest lease factor which will result in the lowest payment.
I have one final warning about leasing. Just as a dealer will mark up the interest rate from the bank when you finance a car, a dealer will mark up the lease factor (interest cost) from the leasing company. Be sure that that the dealer has not done this on your lease contract. Agree to sign the lease contract only if the dealer will guarantee in writing that he has not marked up the lease factor that the leasing company charges.