Fleeced By the Lease

It sounds like such a great deal. You can drive that shiny new car you’ve always wanted for about the same monthly payment as an average sedan. If you lease the car, your payments will be a fraction of what it would cost to buy the same vehicle new. So you plunk down the initial down payment, and drive your dream car off the lot.

I’ve been there, too. I heard from a lot of people, some whose opinion I really trusted, told me that leasing was much better than buying. So, based on their recommendations, my wife and I signed the lease on a new Toyota Camry. Looking back, I can see what a mistake it was, and one I will never make again.

Instead of being the best way to get a new car, Consumer Reports and Smart Money magazines both say that leasing is the worst way to acquire a new vehicle. You make monthly payments to use someone else’s property, and at the end of the lease you have to give the vehicle back. Most lease agreements have a purchase option written into them that allows you to buy the vehicle after the end of the lease, but this agreement is not much better than a “rent to own” program. If you decide not to purchase your car, you still need a replacement vehicle. Without a trade-in vehicle, you will have to pay the full price of another car, or enter into a new lease.

Just look at the numbers. Say you lease a car with a $22,000 value. In three years when you turn the car in, its value will be approximately $10,000. Who do you think is paying for that lost value? That’s right, it’s you. You are paying $333.00 each month for the value the car is losing. In addition to the cost of the lost value, you are also paying for the ability to use the car, plus interest. How much interest? It’s hard to say, but interest rates are typically very high.

While the law requires full lending disclosure, the powerful auto industry lobby has argued leasing is not the same as lending. Because they have convinced lawmakers of this difference, leasing agents are not required to disclose the full APR in leasing agreements. The Federal Trade Commission requires “Truth in Lending” when you purchase a vehicle or get a mortgage, but those requirements don’t hold true when leasing a car or truck.

One thing to remember is that dealers do not finance the lease. The lease is handled by a finance company or a bank. It is the finance company that sets the interest rate, base on your finance score. The dirty little truth is, dealers “bump” the interest rate for their own profit. They justify this as an expense for brokering the lease, but in reality, it is just additional profit for the dealer.

Another way the dealer makes money off of leasing a car is in additional fees. Leases are written based on a certain number of miles. Anything over that mileage limit and you will pay a penalty for the excess miles. This is typically between 15 to 20 cents per mile. Depending on how much you use the car, this could range form a few hundred to a few thousand dollars you owe at the end of your lease agreement.
There is also a fee added on for wear and tear of the vehicle. Any damages, nicks, scratches, or carpet stains that happened over the past three years may result in an additional charge to you. I was fortunate at the end of my lease to avoid any damage fees. Toyota was very forgiving of normal wear and tear, but I have heard horror stories from others.

So, if leasing is such a bad deal, why is it so popular? Because car leases are a great deal for the dealer. Dealers have successfully marketed the advantages of car leases while glossing over the true cost. You get a new car for a lower monthly payment, and at the end of the lease, you can give it back and get another new car. However, you should know that no dealer is going to take a loss in profits because they’re so concerned about you getting your new car.

In a recent article, Smart Money magazine quoted the National Auto Dealers Association stating that purchasing a new car with cash gives the dealer an average of $82 in profit. When that same car is financed the dealer makes $775. When that car is leased the dealer will make an average of $1,300. Is it any wonder that they are so happy to help you lease a new car?

So what happens to all of those leased vehicle once they’re turned back in? They show up on the lot as low mileage used cars. Negotiating a deal on those is where the real deals are found.