Car leasing has become an increasingly popular way to get behind the wheel of a new vehicle. For consumers, it can offer lower monthly payments and the chance to drive a new car more often. But have you ever wondered Why Do Car Dealers Love Leases So Much? It turns out, leasing can be significantly more profitable for dealerships than traditional car sales. While you might think leasing is primarily managed by banks or financing companies, dealerships play a crucial role and have several avenues to increase their earnings in a lease agreement.
One of the primary reasons dealerships favor leases lies in the inherent complexity of the leasing process. Unlike buying, leasing involves a unique set of terms and calculations that can be confusing for the average consumer. Terms like “money factor,” “residual value,” and “capitalized cost” are not part of everyday vocabulary, and this unfamiliarity can be leveraged by dealerships to their advantage.
Consumers often focus heavily on the monthly payment amount when leasing, sometimes to the detriment of the overall deal. This concentration on the monthly figure can distract from other crucial aspects, such as the actual price of the vehicle. Just as with a car purchase, negotiating the car’s price, known as the capitalized cost in leasing, is paramount. However, many lessees are unaware of this or underestimate its importance.
Dealers are astute to this tendency. They can subtly inflate the capitalized cost, essentially the sale price of the car for the lease, without the customer realizing it. By increasing this price, even slightly, they boost their profit margin right from the start. In some instances, dealerships might even lease a vehicle at its full Manufacturer’s Suggested Retail Price (MSRP), securing a substantial profit that might be harder to achieve in a direct purchase negotiation.
Another significant profit center for dealers in leasing is the markup on the money factor, which is essentially the interest rate you pay on the lease. The money factor is often presented as a small decimal, for example, 0.00375, which appears insignificant to many. However, this seemingly small number translates to a substantial annual percentage rate (APR). To calculate the APR from the money factor, you simply multiply it by 2,400. In our example, a money factor of 0.00375 equates to a 9% interest rate.
Dealerships often have the flexibility to markup the money factor. Even a seemingly minor increase can result in a considerable profit increase for the dealer over the lease term. For instance, a dealer might mark up the money factor by a small fraction, which, when converted to APR, could add several percentage points to the interest you’re paying. This hidden interest rate markup can easily add hundreds, if not thousands, of dollars to the dealer’s profit over the life of the lease, without the lessee being fully aware.
Furthermore, dealerships can also profit from marking up acquisition fees associated with the lease. These fees, charged by the leasing company to set up the lease, are another area where dealers can add a margin. While these markups might seem small individually, they contribute to the overall increased profitability of leases for dealerships.
Dealers also seek out lease agreements that allow them to finance the vehicle at or even above the MSRP. This creates an opportunity to add high-margin extras and add-ons to the vehicle, such as pinstriping or other accessories. Because these additions are rolled into the overall financed amount of the lease, their impact on the monthly payment can appear minimal. However, these extras inflate the capitalized cost and therefore the dealership’s profit, often without the consumer fully realizing the added expense. A seemingly small increase in the monthly lease payment, perhaps just $29 on a 36-month lease, can accumulate to over $1,000 in extra costs over the lease term.
In conclusion, the complexity of car leasing, coupled with the consumer’s focus on monthly payments, creates a fertile ground for dealerships to maximize their profits. By understanding the key areas where dealers make money on leases – capitalized cost markups, money factor inflation, and add-on inclusions – consumers can become more informed and negotiate more effectively. Educating yourself about the leasing process is your best defense against overpaying and ensuring you get a fair lease deal. Knowledge is power, especially when navigating the world of car leasing.
