How Dealers Make Money on Leasing
Contrary to what many people think, car dealers aren't the ones that actually lease out the vehicle. Leasing is just another method of financing, so you'll actually be leasing through a bank or leasing company.
This doesn't mean a dealer won't make money off a lease. In fact, most dealers LOVE leasing because it allows them to make more profit than a traditional car purchase.
One of the main reasons for this is due to the confusing nature of car leasing. Consumers are not used to leasing terminology and there's a lot of confusion. You hear terms like money factors, capitalized cost reduction, residuals, acquisition fees, and wonder what it all means.
Leasing is pretty straightforward once you learn how it works, but to the uninitiated it's a complex web that can cost you a lot of money.
In a lease, consumers tend to concentrate on the monthly payment instead of the price of the car. It's just as important to negotiate the price during the lease as it is when you're buying, but a lot of consumers don't realize this.
What ends up happening is the dealer will raise the purchase price of the car higher than they would if you were buying it.
In lease terms, the purchase price is called the capitalized cost, and it affects your monthly payments considerably. While you're focusing on low monthly lease payments, you don't realize the price of the car was too high.
Some dealers even get away with selling the car at full MSRP, pocketing a profit of several thousand dollars.
Another way dealers make money off leasing is to markup the interest rate (which is called the money factor). Money factors are presented as fractions, such as .00375, which can be confusing.
They seem low, but you need to convert them to an annual percentage rate in order to see if they're fair or not. To do so, you just multiply the money factor by 2,400.
A .00375 money factor equals 9% interest. A dealer can easily mark up a money factor by a small amount and while it may seem low, when you calculate it into a percent, the dealer could be making upwards of 3% interest on your financing. This can add up to a profit of more than $1,500 for the dealer.
Dealers aren't necessarily looking out for your best interest when they're shopping for a lease deal. They usually have several leasing companies and banks they work with to offer leasing, and they look for deals which will give them the highest interest rate markups and in some cases, markups on the acquisition fees as well.
They also look for lease deals which allow them to finance the full MSRP of the vehicle or more. That way, they can add high margin items such as pin striping or other useless add-ons that increase the price of the vehicle (and thus the amount financed). Most consumers don't even realize that things have been added on, because it may only add a few dollars to the lease payment.
On a 36 month lease, a $29 increase in the monthly payment doesn't seem like much, but over the life of the lease, that works out to over $1,000 in extra cost.
By now you should realize your best defense against getting ripped off during a lease is to educate yourself. A little knowledge goes a long way in leasing.
My Recommendation for Car ShoppersTrueCar No-Haggle, Edmunds Price Promise and Ryde Shopper are the quickest way to see the lowest car prices in your area. These sites show you no-haggle prices from dealers closest to you - and the deals are usually really good. This should be the first step you take when negotiating your car price. Follow this up with my checklist to make sure you squeeze out every last bit of savings.
- Gregg Fidan
- Best Rebates, Incentives, and Lease Deals
- Latest Car Buying Scams and Tricks
- The Best & Worst Time to Buy a Car
- Which Cars You Should Avoid
About: Gregg Fidan
Gregg Fidan + is the founder of RealCarTips. After being ripped off on his first car purchase, he devoted several years to figuring out the best ways to avoid scams and negotiate the best car deals. He has written hundreds of articles on the subject of car buying and taught thousands of car shoppers how to get the best deals.