By Car Buying Tips
By Robert Hammer and Stefanie Kelly
Buying or leasing a new car should be a pleasant experience, from the initial excitement that accompanies the decision-making process to the thrill of finally getting behind the wheel.
But for many consumers the prospect of entering a dealer’s showroom - the traditional first step toward acquiring a new vehicle - is an unsavory one.
Car dealers are notorious for certain “hard sell” tactics that are revolting to the average consumer. Beyond their aggressive antics on the showroom floor, dealers have many tricks up their sleeves that are unknown to consumers.
We hope, in this and future columns, to demystify the car-buying process by offering tips, insights, anecdotes and answers to your questions.
This month’s topic is leasing.
When you lease a new vehicle, you do not lease it directly from the dealer, but rather from the bank chosen by the dealer or leasing company, be it the manufacturer’s financial institution - Mercedes Benz, BMW, Lexus, Ford, etc. - or Chase Manhattan, Bank of America, Wells Fargo, etc.
The bank’s internal buy rate is expressed as a money factor, as opposed to an interest rate. It is by marking up this money factor that the dealer makes more than a minimal profit on your transaction. And because there is no consumer lending involved, the dealer is not required by federal law to disclose the money factor - as is the case with interest rates.
Because leasing is a much more complicated transaction than purchasing, for dealers, leasing companies and, yes, brokers of the less reputable variety, this type of transaction presents an irresistible opportunity to make excess profit on your new vehicle. Here is an example:
Suppose the buy rate being charged to the dealer by the bank is subsidized by the manufacturer. The dealer tells you the rate you are being charged is .00350, which converts to approximately 8.4 percent effective interest. Consumer Reports and chat rooms tell you this is a reasonable rate, but unbeknownst to you, the internal buy rate actually being charged to the dealer by the subsidizing bank is .00170, or approximately 4.0% effective interest. So on a $45,000 vehicle, the extra profit the dealer would make over a four-year lease is $5,800 - that’s pure excess profit!
Without being aware of this information, you essentially are at the mercy of the party through whom you lease your vehicle; when the salesman emerges from the finance manager’s office and presents you with the lease numbers, you have no way of knowing just how those numbers have been “massaged.”
A smart consumer will investigate this information before signing a lease contract. At the beginning of each month, banks fax auto dealers their residuals and buy rates for the month.
Dealers then arrange lease transactions through the bank that is most advantageous/profitable to the dealer or leasing company.
You will be hard-pressed to find a dealer who is willing to disclose the internal buy rate, but a good broker will have access to this information and will be able to protect you in your lease transaction by preventing the dealer from marking your lease up one penny.
Buying or leasing a new car is a serious investment that requires a significant amount of homework. Particularly when leasing, in addition to choosing the make, model, and specifications of your new vehicle, you should be as informed as possible about the economics of your transaction.
The bottom line in leasing is that you cannot win unless you find a fee-based broker who will act in your best interest by protecting you from this form of price-gouging.
If you decide to work with a broker be sure it’s someone who can demonstrate to you, preferably through references, that he or she has a proven track record.
And above all, proceed with caution!
Hammer and Kelly are associated with Hammer Auto, a new car auto broker in Palo Alto. For more information, call 813-6100 or visit the Web site at www. hammerauto.com.
