Who really makes money when you lease a new car or truck?

By Steven A. Simons

We’ve all seen the ads: “0% Financing”, “Nothing Down” or even “Drive a New Jaguar for only $500.00 per month”. Sounds too good to be true – doesn’t it? Well if it seems too good to be true it probably is. To see how it all works, let’s follow “Joe Buyer” as he travels the treacherous road called automotive financing.

Mr. Buyer had spent weeks looking for a new vehicle to buy. He was interested in a new sport utility vehicle. He’d looked at Durango ‘s, Blazers, Expeditions, and even the Montero. After hours of searching for just the right car, he settled on a GMC Yukon.

Joe now needed to be ready for the next step, called “the sales process”. He considered himself smart, having a college degree and years of work experience in the aerospace industry. He was also approaching retirement and did not want the burden of monthly payments. So he jumped on the Internet and researched the best price for the Yukon with various desired options available.

Armed with this research, Joe called his local GMC dealer and asked if they could make a deal at $500.00 over the manufacturer’s invoice. The friendly salesman on the other end of the line, “Sammy Slick”, replies, “That sounds like something we can work with”. (This is lie number one.) Then, like Monty Hall on “Let’s Make A Deal”, Sammy Slick barks, “Come on down!”

Joe Buyer travels to the dealership and, after meeting with Mr. Slick, settles on a Yukon with all of his desired options. The window sticker says $36,995.00. Joe then asks to see the manufacturers invoice. “It’s not available,” says Sammy, (lie number 2) “but we can figure out the invoice because the markup on the Yukon is only $2,500.00″. So if we deduct $2,000.00 from the window sticker we will be at the price you want.” (Lie number 3). Joe Buyer agrees to this. Now comes the “close”.

Mr. Slick takes Joe Buyer into the sales office and prepares a credit application. This puzzles Buyer, who wants to pay cash. Slick says that it is “required on all transactions”. (Lie number 4) He then disappears for several minutes and returns with “Charlie Closer”. Charlie says to Joe, “Mr. Buyer, you have excellent credit”, waving a copy of Joe’s credit report. “We have several programs that will save you money.” (Lie number 5) Dismissing Buyer’s protests that he wants to pay cash, Closer launches into the “sales pitch”. After 15-20 minutes, Joe Buyer is “convinced” that the program will save him money and agrees to sign on the dotted line. (There are a number of tricks in the lease contract that we won’t go into at this time.)

So the burning question is: why would the dealership go to such extremes to NOT sell a Yukon for cash? And the simple reason is because in cash transactions the dealer losses money. If the dealer can get you to sign a finance contract the dealer makes money – not just on the sale of the vehicle, but on the sale of the contract to the bank. And, if the dealer can get your signature on a lease contract, the dealer can make even more money. Why? Because the dealer may write a contract with you for 10 or 12 or even 20% interest, and even if you have good credit. The dealer then simply sells the contract to the bank or finance company for a better rate and pockets the difference in the interest spread.

As an example, on one recent transaction involving a $24,800.00 car loan that our office reviewed, the contract was written at 12.9%. Over the life of the loan that’s $12,989.00 in interest. The buyer was repeatedly assured that this was the best rate he qualified for based on his credit. The dealer then turned around, that afternoon, and based upon the Buyer’s excellent credit, sold the contract to a bank for 10.9%. The bank wired the money to the dealer the next day, including almost $2,000.00 for the interest spread. Was the buyer told that the bank would loan him the money at 10.9%? NO! Was the buyer told that the dealer was using his credit to make a fast 2% profit? Again the answer is NO! Had the buyer known that he qualified for the 10.9% financing would he have asked for the 10.9% rate? You bet he would have. Over the life of the loan that 2% interest equaled about 4 extra car payments the buyer had to pay. All of that for an extra profit by the dealer that was never disclosed to the buyer!

But wait — there is even bigger incentive for the dealer to push a “lease” on the customer. When the dealer writes a lease contract, the “agreed value” of the car is not limited to the price negotiated between the buyer and the dealer. In fact, most buyers do not notice that the lease contains an “agreed value”. However, it is the so-called agreed value that determines the “lease payments”. Furthermore, it is the agreed value, when calculated with other figures, that determines the rate that the bank pays the dealer for the contract. In fact, many banks will allow the “agreed value” to be as much as 125% of the “Manufacturer’s Suggested Retail Price”. Therefore, a vehicle with a window sticker at $24.000.00 could have an agreed value on a lease of as much as $30,000.00. That’s another $6,000.00 profit for the dealer.

In one recent transaction the dealer advertised a used pickup in a local paper for $16,735.00. A buyer appeared with $8,500.00 as a cash down payment, and walked out of the dealership with a LEASE containing an agreed value of $29,705.00. That was a whopping $13,000.00 mark-up over the ad price and more than $7,000.00 over the Kelly “Blue Book” for the vehicle! In addition, the cash-down payment disappeared so that at the lease end the buyer was required to pay $14,000 for the truck. What happened to the $8,500.00? The dealer ‘swallowed’ it in the transaction (i.e., it literally ‘disappeared’ as through some demonic magic, i.e., it quite simply was never mentioned in the lease transaction). This is a blatant fraud.

A nationally recognized automotive finance expert, David Stivers, informed our office that the Federal Trade Commission, in the mid 1990’s, began advising dealers that leases where the cash down-payment exceeds 25% of the vehicle’s value are not true leases. Therefore, it is to the dealer’s advantage to swallow the down payment. This not only increases the “up front” money the dealer pockets, but also increases the amount due on the contract so that the dealer can recover more from the finance company when the contract is sold.

When you are in the market for a new car or truck if the deal sounds too good to be true – – – then it probably is. If the deal sounds too confusing — ask for a written copy of the proposed deal, take it home and try to decipher it in the comfort of your home. If the dealer refuses to give you a copy then RUN, don’t walk, as fast you can because that dealer is out to rob you of your money.