Leasing a Car Can be Hazardous to your (Financial) Health

I recently received an email from a very smart man and a reader of this column who was recently victimized by a car dealer when he leased a Mazda. The dealer had added a second dealer fee, calling it an “electronic filing fee” into the capitalized cost of the lease. He found this particular dealer through TrueCar, a vehicle purchasing referral service that I’ve recommended in this column. In full disclosure, I’m a member of TrueCar’s national dealer council and a stockholder.

This man’s experience reminded me of the fact that leasing is far more complicated than buying a car. It also reminded me of the old saying, “If you sit down at a high stakes poker game, look around the table and can’t find the ‘sucker’, then you’re it.” When you walk into a car dealership (high stakes poker game) you can be sure that the salesman, sales manager, and F&I manager all know far more about leasing than you do. I’m not suggesting that you shouldn’t lease a car because sometimes leasing can be better than buying; but buying is easier to understand and therefore you’re less likely to be taken advantage of.

I’m going to assume that you understand how to buy a car. I recommend that you determine the exact year-make-model vehicle you want and determine the exact MSRP, manufacturer’s recommended retail price. Once you’ve done this, get at least 3 bid from three dealers. This is best and most easily accomplished using the Internet. I also recommend that you use www.TrueCar.com. Unfortunately, TrueCar currently gives only an estimated lease payment but will shortly be making available a firm one. When using TrueCar for a purchase price, be sure that you go beyond the TrueCar lowest price estimate page and view the True Car Buying Certificate. The estimate page does not disclose additional dealer fees, dealer installed accessories, or anything else the dealer will be adding to his “TrueCar price”. You can see these extras when you go on to the page that shows you the TrueCar buying Certificate. But even then, you must be careful when you visit the dealer who appears to have the lowest price or payment. This is how the “very smart man” that I mentioned in the first paragraph was tricked. He did get the final price including dealer fees, but the dealer lied to him and added another fee disguised as an official fee. The dealer called this an “electronic filing fee”, yet it was just another dealer fee in disguise.

It’s important to mention here that I fear that some buyers hesitate to navigate to the TrueCar page with the price certificate because doing so requires revealing one’s identity and contact information to the dealer. However, if you want to maintain your anonymity, you can always use an alias, make up a phone number, and create a different email address.

Now, back to leasing. When you have received your bids from three dealers, make sure you have information about the three most important variables in leasing for you to compare. The first is “capitalized cost”. This is the selling price of the car. Next you have to compare the “money factor” which is similar to the annual percentage rate on a purchase contract. The final factor in determining the lowest lease payment is the residual value of the car you’re leasing. The residual value is what the lender forecasts the vehicle to be worth at the end of the lease. While the capitalized cost and money factor should be low, the residual value should be high. You want to lease from the dealer that offers you the lowest capitalized cost, money factor, but the highest residual. This sounds like a lot of time and work and it is. A quicker way would be to competitively shop the lease payment with at least 3 dealers just like you did the price. If you do this, just be sure you are using the same length of lease e.g. 24 months, 36 months, or whatever. Also be very sure you are getting the lease payment quote on the exact same car (same MSRP and identical options) from each dealer.

It’s probably obvious by now why you can so easily be taken advantage of when leasing. Dealers and manufacturers will strongly encourage you to lease rather than buy. Lease advertising far outweighs purchase advertising. There are two important reasons for this. First, car dealers can make a lot more profit on a least than a purchase. Secondly, when you lease a car you must return the car to the dealer after the lease period is over. This gives the dealer and the leasing company total control (you don’t own the car; the leasing company does) and a better chance of leasing or selling you another car. Even when prospective customers come into a dealership to buy, they will be “strongly encouraged” to lease. I’m called by customers of other dealerships who thought they’d bought a car only to find out they’d signed a lease contract instead!

Nevertheless, a lease when negotiated skillfully can be just as good a deal as a purchase and sometimes better. A lease special by the manufacturer is almost always a very good deal if you do your homework on the capitalized cost. The rate and the residual are set by the manufacturer, but the dealer can inflate the capitalized cost. Please remember to be sure the low price you negotiated is the same as the capitalized cost on the lease contract.

Finally, if you are not treated honestly by a TrueCar dealer, call their toll free number. My experience with TrueCar assures me that they will “make right” any failure on the part of a dealer not being honest with you, including refunding unwarranted charges. Please just refer to the TrueCar Total Transparency Pledge:

"Total Transparency Pledge: As a TrueCar Certified Dealer, “Dealer’s Name” is committed to total price transparency. This means “Dealer’s Name” discloses its dealer fees and commonly installed dealer accessories in its pricing estimates. Call 1-888-TRUECAR if you have questions or concerns.

MINIMIZING THE PAIN OF HAVING YOUR CAR SERVICED

The pain of buying a used or new car may be greater than the pain of having it serviced, but you need to have it serviced far more often than you have to buy a car. Below, I am listing eight suggestions to make your visit to your car dealer’s service department as pleasant as possible.

• Choose the dealer with the best service department. Remember that you don’t have to have the same dealership service your car that sold you your car. You probably bought your car from the dealer who gave you the best price. You should have your car serviced at the dealer who can best maintain and repair your car. The price of service is important, but secondary to the quality of the service and repairs. Do a little research and “Google” the name of the business and read the online reviews on their Google+ page, on Yelp, Edmunds.com, etc… Choose a service center with a large number of positive reviews. Check with the BBB and the County Office of Consumer Affairs. Ask the service manager at the dealership to show you his factory score on CSI (customer satisfaction index). Every manufacturer surveys dealers’ service customers and ranks that dealer by how well he treats his customers.

• Establish a personal relationship with your service advisor. The person in the service drive who writes up your repair order is very important. Be sure you get a good one. He should be knowledgeable, attentive to your needs, promptly return phone calls, and recommend only necessary services. You might not find this person on your first visit, but if you aren’t comfortable with the person you are dealing with, ask for one with whom you are. When you make an appointment to have your car serviced, always ask for that service advisor. 

• Don’t pay the “gotcha”, miscellaneous supplies fee. Almost all car dealers tack on a phony fee when you pay your bill which is simply more profit to the dealer, but is disguised by various labels. It is also sometimes called “environmental impact fee”, “sundry shop supplies” and many others. The cashier just adds a percentage ranging from 5% to 10% to your bill. This is no different than the “dealer fee” that the sales department tacked on to the price they quoted you on the price of the car. Most dealers will waive this fee if you complain about it, especially if you threaten to call the BBB, their manufacturer, or the Florida Attorney General’s office. You can contact the Attorney General of Florida, Pam Bondi, at www.MyFloridaLegal.com. 

• Always road test your car, preferably with the technician. If you brought your car in for a drivability problem such as a noise, vibration, or pulling to the right or left, don’t accept the car back until you ride in the car with the technician or service advisor and confirm that the problem has been remedied. I also recommend that you drive the car with the service advisor to demonstrate the problem when you bring it in. Experiencing what you experience always communicates your problem more accurately than listening to your description of the problem.

• Ask for a written estimate of the total cost of repairs and maintenance. Florida law requires that the dealer give you a written estimate. By law, they may not exceed this by more than 10%.

• Make an appointment ahead of time. You should insist on making an appointment and you should try to make that appointment at a time when the dealer’s service department will be least busy…typically the middle of the afternoon on weekdays or Saturday and Sunday. Avoid the 7:30-8:00 morning rush. When your service advisor has written up your repair order, ask him how long it will take. After he tells you, ask him to let you know ahead of time if, for any unforeseen reason, your car will not be ready in the promised time. Often times when you call a service department they will tell you to “bring the car in anytime” or “come right over”. Service advisors will tell you this because they are either too busy or too lazy to take the time to make a proper appointment. When they tell you this, tell them that your time is very valuable and that you insist on an appointment at a time when they can get you in and out quickly. Always write down the name of the person that gave you the appointment.

• Shop and compare high cost repair prices. Most service departments are competitive on maintenance items like oil changes, wheel alignments, and tire rotations. However, the costs of major repairs can vary considerably. If you are looking at an air-conditioner, transmission, or engine repair that can cost several thousands of dollars, get bids from more than one service department. Often just suggesting that you will do this will keep the cost down from the dealership you prefer.

• Introduce yourself to the service manager. This falls along the same philosophy as developing a good personal relationship with your service advisor. It can’t hurt to know the “boss”. If you are on first name basis with the service manager, it just might earn you a slightly higher level of treatment from those that work for him.