Monday, September 14, 2020

Why Car Dealers and Manufacturers Want You to Lease Instead of Buy

“Follow the money” is a very common phrase. It’s the best tactic to catch criminals and decide when a politician or car dealer/manufacturer is telling the truth. Car dealers’ profit on leased car averages at least twice the profit on a purchased car. Also, a customer is more than twice as likely to lease or buy her next car from the same dealer if she leases.

Therefore, you shouldn’t be surprised that most of the new vehicle advertising are “lease payments” and that the number of leased cars has soared in recent years. Leasing used to be an anomaly, maybe 5% of total sales, and now it’s about one-third. Some makes are approaching 50% leasing. So, you ask, how can the dealers make so much more money leasing than selling, and still increase their percentage of leases? It’s very simple; they trick you into believing that leasing costs you less!

Dealers can do this because leasing is far more complex than buying; there are many more variables. Remember that car dealers are professionals and experts at what they do and understand the complexity of a lease “inside and out”. Leasing a new vehicle from a car dealer is like you sitting down at a poker game with a bunch of professionals. There’s an old joke, “If you sit down at a poker game and you have to look around the table to find the sucker…you’re him.”

When you buy a car, you just must confirm that the price you write your check out for is the lowest price you found after comparing several sellers…simple. When you lease a car, you’re “buying a monthly payment”. But the problem is the dealer can almost always give you the monthly payment you think you can afford by manipulating other variables. Hidden fees are among the most popular deceptions. A few are as follows: Penalty for exceeding the maximum allowed mileage. “Lease acquisition fee”, kind of like a dealer fee for leases, but they also charge you their regular dealer fee. Lease disposition fee at the end of the lease which is where “they get you coming and going”. Charges for “above normal wear and tear” is one of the largest and most abused hidden fees. This is what the leasing company “thinks” the cost is that you’ve damaged your vehicle above their version of “normal”. These hidden fees can total in the thousands of dollars. I’m convinced that many leasing companies consider this overcharging for nominal and nonexistent damage to be an important profit center.

When “buying a monthly payment” you must understand that a car dealer can manipulate variables to give you most any monthly payment you desire. The biggest variable is down payment, always large and hidden in the fine print. A $399 per month lease payment may fit your budget exactly but is it for 12 months or 60 months? A favorite trick to advertise a low monthly payment is have a short-term lease with a large down payment. A big down payment on a 12-month lease vs. a 36-month lease substantially reduces the monthly payment, but you have the use of the vehicle for only one-third of the time. Large down payments aren’t always just hidden in the fine print. Some lessors “forget about their trade-in” when they lease. Getting a fair price for your current car reduces the monthly payment. I get calls from “lease victims” who received nothing ($0.00) for their trade-in.

Remember that almost everybody is a payment buyer. We make our mortgage or rental payments monthly. Our electric and phone bill is monthly. We pay our credit card bills monthly. Few people pay cash for larger purchases, especially when interest rates are so small. When wedo buy a car, we finance it and make monthly payments. It’s no wonder that dealers and auto manufacturers understand and use this to their unfair advantage.

Also remember that when you lease a car, you’re building no equity; it’s like renting a home instead of making mortgage payments. When you’re ready to buy or lease another car, the only down payment available to you is out of your pocket or bank account. In fact, one of the most nefarious things about leasing is that you get trapped into leasing again because you can’t afford a down payment large enough to get a payment you can afford. Too many folks that lease their first car believe they can return the car to the dealer before the end of the lease, like you would a rental car. When you sign on the dotted line for lease, you’re obligated for every single payment whether you like it or not…even if you can’t drive the car anymore. If you die, your estate is responsible for the rest of the payments.

There is no inherent financial advantage to leasing over buying. If you shop and compare a lease payment with at least three other car dealerships, you can lease a car at just as good a price as if you shopped and compared the purchase price. The difficulty is to recognize all the variables I’ve listed above. You must keep all those variables constant, the same, among all the dealers who quote you a lease payment. This is very difficult to do, especially when you don’t know all the variables. If you pay cash for a new car, there are only two variables…the out-the-door price of the car and the trade-in allowance for your car.

I hope I didn’t convince you that leasing a car is always the worst option. It’s only the worst option when you don’t know all the facts most of which are buried in the fine print. For the first time and “less savvy” buyer/lessor, I recommend buying over leasing. For the more savvy, sophisticated, new vehicle intenders, leasing is a good alternative when you fully inform yourself about hidden costs, fine print, and the salesman’s smoke and mirrors B.S. Never, never, never lease a car when you visited the dealership wanting and expecting to buy. Car salesman are trained to, what car dealers call, “Flipping you to a lease”. The easiest person to take advantage of on a lease is the one that was intending to buy. The salesman will double his commission and the dealer will double his profit when you get “flipped to a lease”.

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