For you to make the best deal possible when buying a car, it is important to know and understand how a car dealer makes money off a lease.
Does dealer make money off a lease?
Just because a lease is a regular financing method does not mean that the car dealer does not make money. In fact sometimes, dealers can make more money off a lease than a regular loan purchase. The main reason this occurs is the complicated nature of a lease. Leasing can be a confusing concept for buyers and most of them struggle to get the grasp of it.
Another way dealers make money off a lease is by marking up the interest rate or money factor. Money factors are usually presented as decimals such as .00285 which seem low but isn’t really. A buyer should convert them to an annual rate to see if they’re fair or not. To do this, multiply the said factor by 2400. Once you covert this, you realize that the dealer is making an upward of up to $1500.
What is a car lease and how does it work?
The general public understanding is that is translates to lower monthly payments but there’s so much more to it than that. The closest idea to leasing is to say that it’s similar to renting but this is still misleading and inaccurate. A much better description would be that leasing is a type of financing. This is where the buyer pays for the use of the vehicle instead of the purchase of a vehicle.
The use of a car includes its loss in value, or depreciation cost, excessive wear and tear and excessive mileage caused in the period of lease. In traditional financing the buyer pays an interest rate on the purchase price of the car. That’s why to a dealer, a lease is no different than a regular purchase.
Unlike a regular purchase, there is no principal charge to be paid. Instead, the payment a buyer makes is goes toward the use of the car plus the finance charge. The overall cost of financing through leasing is always higher than a traditional car loan because the buyer is never paying principal.
For example, if the buying price for a car is $20,000 and the lease is 2 years long, the buyer will pay interest on the $20,000 for the agreed period. A traditional car loan works differently however as a portion of the monthly payments goes toward paying off the principal therefore constantly reducing the amount owed to the bank, thus reducing the finance charge.
The main advantage of leasing is that the buyer is able to return the car back to the leasing company after the agreed term period is over. The buyer is able to avoid the struggle of selling the vehicle since it is left to the company.
For example, assume you lease a car worth $20,000 and the company sells it for $15,000 at the end of a lease. It seems that they’ve made a $5000 loss but this isn’t the case. The ‘loss’ is the cost of use of the car for which you paid off as part of the monthly lease payments.
The leasing company now makes money by charging interest rate on the 20k used to purchase the car in addition to acquisition fee and a disposition fee. This adds a $500 to $1000 to their profit.
Why do car dealers want you to lease?
When leasing, a dealer only has their interest at heart. The dealer is looking for the best possible deal for themselves, deals which will give them high interest rate markups and markups with acquisition fees.
They look for deals that offer full Manufacturer Suggested Retail Price of the car. This is so they can have impractical add-ons that add to the price of the car. Think of it this way, on a three year lease, a $20 increase in monthly payment does not seem like a lot but over the lease period it works out to over a $1000 in extras.
To be on the safe side as a buyer and avoid being duped, there are a few do’s you, as the buyer should follow.
Negotiate Purchase Price: A lower purchase price will lower the overall cost of the total lease cost.
Read the fine print: When shopping for a lease you’ll find ads that seem too good to be true. Reading the fine print reveals catch on these ads, such as the car has a large security deposit or high down payments. When you look at these you realize the deal isn’t that great
Lease a car with high resale value
Lease early in the model year
Are there any benefits to leasing?
There are a few buyer benefits of leasing. They include:
- The buyer gets to enjoy the car during its most trouble-free years
- Since the car is new, it is covered by manufacturer’s warranty which may include free oil changes and other discounted offers.
- Buyers are able to drive higher priced, better equipped car that they might not be otherwise able to afford
- Buyers don’t have to worry about fluctuations in the car’s trade-in value or through the hustle of selling it when it’s time to move on.
- At the end you just drop off the car at the dealer
The Cons of Leasing
- The most obvious downside to leasing is it’s more expensive than an equivalent loan because you’re driving a rapidly depreciating asset.
- Lease contracts have a limited number of miles. If you go over the limit, you play a penalty for the excess mileage.
- Monthly payments can go over forever if you always lasing your cars.
- There is a penalty for excess wear and tear when you turn it in.
- If you need to get out of a lease before the agreed term, you will be subjected to heavy penalties and termination fees. Most times, these charges are equal to the amount total lease amount.
In conclusion, a car dealer will always prefer a lease since they are more in control when a lease is involved.