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The route to car ownership is filled with many options and leasing can be one for those who do not want to commit to a long-term purchase.
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Pros and Cons of Leasing a Car
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The route to car ownership is filled with many options and leasing can be one for those who do not want to commit to a long-term purchase.
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Actually the F&I manager (financial manager as you called them) gets your credit approved and tries to sell you some of the products they sell (warranties, alarms, etc)...they have a set price they must stay above (usually won't go lower then 5% above invoice), but the salesmanager/general manager can.
I have leased since 2001, with the exception of my Mustang and Solstice. Both were used. When I can get a $45k F150 for $229/mth for 2 years vs. $800/mth, the choice is pretty simple. Same with my current car....$400/mth for a lease or $900/mth to buy....hmmmm. Considering I'd be in the rears for the first 3.5 years, it makes more sense to lease, especially since I tend to change cars every 3 years anyway.
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They can never sell me something I am not interested in....I am too old to let them scare me. And if they change the price at any time....out the door I walk.
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There are two reasons it makes financial sense to lease:
1. You are a business that doesn't want to have capital tied up in a full purchase.
2. You get to deduct the full lease payment every month.
However, the 'prop up the economy' tax changes that were made now let businesses deduct the full cost of a capital expenditure in year 0, so you can make payments on a purchased vehicle for five years or more, but take the full cost of the vehicle as a deduction in the tax year in which it was purchased. So #2 above is currently moot.
I can't speak to your $229/month lease of a $45,000 truck, but did just buy an off-lease Lexus GX. The residual on these is about 52% of MSRP, so the lessee paid it down to about $32,000 over three years. I paid $38.8k, which was a very good deal (23,000 miles). So the sucker who only compared their monthly lease vs. purchase cost made the dealership almost $7000 when they turned it in, having paid it down much more than it had actually depreciated.
On top of that, people tend to not pay attention to the interest rate on leases, which is obfuscated under the term "money factor", and is the annualized rate divided by 24. Why is an annual rate that is assessed monthly divided by 24? I think most people can sort that one out for themselves.
https://en.wikipedia.org/wiki/Annual_percentage_rate#Money_factor
I will challenge your assertion that your new car purchase is under water for 3.5 years. Unless your loan term is 10 years, I don't see how that could be the case, in general. If you put 100,000 miles a year on it, sure, but you certainly aren't getting 200,000 miles on your $229/month two year lease.
This is a common misconception among people that a dealership makes $7000 on a car and is obscure. Maybe a Lambo or Ferrari dealer....but not a domestic or comparable foreign....even a luxury domestic dealer doesn't make that much money on a car.
Here's how things work when you lease a car:
A vehicle is leased for a negotiated payment price....usually. The payment must match the sale price. Unless you live in a heavy OE manufacturing area like Detroit, the vehicle is usually sold for invoice or a touch above to compete... So the dealer "pays" invoice for a vehicle. And they keep holdback and finance (about $450 to $1000), and any profit above invoice....which is many cases is less then $200. Now all of the bills for that car have to come out...salesman's pay, floorplan (after the car sits on the lot for 30 days and usually equal to what a lease payment runs), advertising per vehicle, prep, F&I manager's pay, salesmanagers pay and any other associated cost. Most dealerships make about $50-$100 per car sold. And the average dealer sells 50 cars/mth. And now they still have to pay for any property loans, utilities, etc. Some OEs do pay a premium on the number of vehicle sold (FCA and GM), but those dealers usually sell cars for invoice to get volume bonuses.
The dealer will make money on any thing they charge above and beyond the "money rate" set by the lending institution. But, it's not the entire amount, there are tiers. So if they bump the money factor by 1%, they might make $250, 2% might be $500, but it's not payable until after the vehicle's lease is paid in full. But again, this is split between the dealer, salesman, F&I manager and salesmanager. The money factor really doesn't make the lending institution a lot of money...it's usually nominal on your lease and used to average about 1.5%...not a lot of money...about $40/mth.
Now when the car comes back off lease, the lending institution (unless its leased by FMC or GMAC) usually sends it to a massive auction where they're running 1500+ cars/day. If it was lended through FMC or GMAC, the dealer may purchase the vehicle....usually a bit (2% to 5% under residual value on the contract) less. So when you sign the paperwork on the lease, there is an amount (residual value) that the vehicle will be worth at lease term. Usually, this price is more then what you could buy the same used car on the lot....but not always. Enterprise used to be very good at figuring what cars would be worth a ton at auction.... Here's an example using a vehicle that's average:
Residual price: $20,000
Dealer pays $19,000 and sells for $22,000 minus reconditioning (usually on a 36 m.os lease, it will need new tires and a good detail...about $1200).
So you can see, a dealer doesn't make $7k on a car sale upfront... It could after the 3 year lease, but not likely. Furthermore, in today's world, if the dealer has any type of loan on the property, they probably won't be around long.
A dealer pays for all bills with fixed ops...thus the reason it's called fixed ops....service, parts and body shop. They make more on used cars then they do on new cars, bought or leased. The "gravy" for the owner/dealer principle is what they make up front...but, again, most dealers don't cover all their expenses with the back-end because many don't know how to run them or give away the house in service.
Plan pricing does make the dealership more money then selling to a customer that isn't plan priced. That's why so many want you to be planned price, and they don't have to haggle over pricing (unless you're an FCA customer). Ford and GM must sell for the price stated on the invoice for plan pricing....Plan pricing also gives the salesperson about twice what a retail sale would give for Ford/Lincoln, but less for GM and FCA, but again, they get a volume bonus.
Here's how things work when you lease a car:
A vehicle is leased for a negotiated payment price....usually. The payment must match the sale price. Unless you live in a heavy OE manufacturing area like Detroit, the vehicle is usually sold for invoice or a touch above to compete... So the dealer "pays" invoice for a vehicle. And they keep holdback and finance (about $450 to $1000), and any profit above invoice....which is many cases is less then $200. Now all of the bills for that car have to come out...salesman's pay, floorplan (after the car sits on the lot for 30 days and usually equal to what a lease payment runs), advertising per vehicle, prep, F&I manager's pay, salesmanagers pay and any other associated cost. Most dealerships make about $50-$100 per car sold. And the average dealer sells 50 cars/mth. And now they still have to pay for any property loans, utilities, etc. Some OEs do pay a premium on the number of vehicle sold (FCA and GM), but those dealers usually sell cars for invoice to get volume bonuses.
The dealer will make money on any thing they charge above and beyond the "money rate" set by the lending institution. But, it's not the entire amount, there are tiers. So if they bump the money factor by 1%, they might make $250, 2% might be $500, but it's not payable until after the vehicle's lease is paid in full. But again, this is split between the dealer, salesman, F&I manager and salesmanager. The money factor really doesn't make the lending institution a lot of money...it's usually nominal on your lease and used to average about 1.5%...not a lot of money...about $40/mth.
Now when the car comes back off lease, the lending institution (unless its leased by FMC or GMAC) usually sends it to a massive auction where they're running 1500+ cars/day. If it was lended through FMC or GMAC, the dealer may purchase the vehicle....usually a bit (2% to 5% under residual value on the contract) less. So when you sign the paperwork on the lease, there is an amount (residual value) that the vehicle will be worth at lease term. Usually, this price is more then what you could buy the same used car on the lot....but not always. Enterprise used to be very good at figuring what cars would be worth a ton at auction.... Here's an example using a vehicle that's average:
Residual price: $20,000
Dealer pays $19,000 and sells for $22,000 minus reconditioning (usually on a 36 m.os lease, it will need new tires and a good detail...about $1200).
So you can see, a dealer doesn't make $7k on a car sale upfront... It could after the 3 year lease, but not likely. Furthermore, in today's world, if the dealer has any type of loan on the property, they probably won't be around long.
A dealer pays for all bills with fixed ops...thus the reason it's called fixed ops....service, parts and body shop. They make more on used cars then they do on new cars, bought or leased. The "gravy" for the owner/dealer principle is what they make up front...but, again, most dealers don't cover all their expenses with the back-end because many don't know how to run them or give away the house in service.
Plan pricing does make the dealership more money then selling to a customer that isn't plan priced. That's why so many want you to be planned price, and they don't have to haggle over pricing (unless you're an FCA customer). Ford and GM must sell for the price stated on the invoice for plan pricing....Plan pricing also gives the salesperson about twice what a retail sale would give for Ford/Lincoln, but less for GM and FCA, but again, they get a volume bonus.
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I will never fleece a car. It's all a game the dealerships play and don't think for a minute you know more than they do. Don't get me wrong, I love the smell of a new car but I love more the idea of having money in my pocket and being able to retire early.
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Dealerships in the Seattle area are charging $150 to $200/hour for service, at book time, not actual time. My last dealer oil change, perhaps five years ago, was almost $100.
Around here at least, they are certainly not 'giving away the house in service'.
Trust me....if you're a good customer and you've bought a few cars from them and you've had most of your service (warranty and maintenance) done there, they give away the house. Or they will cut costs here and there for you. It's like tonight for dinner with my parents. We always go on Tuesday nights to a local pub for 1/2 off burgers. I always tip at least 20% on what the bill would have been. And the last 3 Tuesdays, we've received dessert on the house for all 3 of us.
I tried to go back into the dealer world in 2018 as a service advisor/service manager trainee.... I chose the wrong dealer. It's the 2nd or 3rd largest CDJR dealer in the country. They sold 1000+ cars/mth... From 2000 to 2008 I worked for the #1 volume Lincoln store and did everything there was to do except wrench on cars.... The CDJR store...SUCKED!!!! The Lincoln store was awesome and I'd go back in a heartbeat if I ever needed a job. The CDJR store, almost every time it came time for a customer to pay for their service, it was a hassle. It was awful. And this store is in one of the wealthiest suburbs around here (Illitch, Penske and Dan Gilbert live in this suburb to give an idea). Any time a customer started getting loud, 10% off the bill. I was there 3 months and will NEVER set foot back in that dealership again! To this day, I still go out to the Lincoln store whenever someone I know wants to buy/lease a Lincoln. I go with them. There are salespeople that are still there, that know when I bring a customer, I'm there because I don't want any games played with my friend/coworker/neighbor....and they don't. It's all about how you "train" your customers in the dealership world. Sorry...but customers are trainable.
I know as much as they do....I sold cars for 3+ years and I worked in service and parts for 8+ years, not too mention F&I and put the deals together for sales... Making sure you don't get screwed is easy, if you know what to look for on the paperwork.
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