Dealerships throughout the country are taking a more serious look at lease alternatives. Statistics show that approximately a fifth of all new vehicles—including cars, trucks, SUVs, and vans—are leased in today’s market. It is a venture worthy of serious attention. This is especially so, because vehicle costs have spiraled upward significantly in recent years, often pricing a customer’s preferred vehicle out of consideration for purchase. With the interest rate on their loans no longer a tax-deductible expense, leasing provides customers with more options and, often, significant benefits over a purchase. There are as many benefits to dealers in such an arrangement as there are to these consumers.
First of all, customers are not typically in a negative equity position when they return their vehicle at the end of a lease; second, they are not concerned about the resale value of the leased vehicle. A lease expiration date assures them—and the dealership—of the opportunity to lease or buy/sell another vehicle, creating a mutually beneficial system. A significant number of customers find the choice to either purchase the leased vehicle or turn it in for a newer model very appealing. These same customers often prefer the shorter term options of a lease versus the longer terms that often accompany the purchase of a new vehicle.
Leasing is a great tool for dealers and customers . . . provided the customers are fully aware they have leased a vehicle and not purchased one. That’s the factor that needs strict consideration by every member of the dealership team—both sales and finance personnel. In this arrangement, as in every other one involving sales and contracts, honesty is the best policy.
Disclosure is Critical
Unfortunately, many customers have misconceptions about leasing a vehicle, and may equate it to renting a car while on vacation. They may think that, when the lease is up, they simply drop off the car and walk away. Some believe they will own the vehicle at the end of the lease. Still others assume that the vehicle manufacturer’s warranty will take care of all mechanical problems during the full lease duration. In many cases, none of these factors apply. The conversations customers had with the sales and finance officers when they signed the lease failed to make these stipulations clear. Is this the customer’s fault? Absolutely not! Full disclosure and a detailed explanation of leasing fundamentals is the responsibility of dealership personnel. It’s also the only way for the dealership to expand its leasing business, keep a satisfied customer base, and avoid potential litigation. Full disclosure is mandatory, not a matter of personal preference.
Regulation M and Leasing Strategies
All dealership personnel must be up to speed on Regulation M. In January of 1998, the Federal Consumer Leasing Act was revised to include certain requirements concerning the basic facts and figures that must be included in every lease contract. These include capitalized cost and cost reduction, lease charges, monthly payments, residual value, among others. Regulation M also requires that your dealership display this information in a uniform way, using standard terminology that can be understood by every reader.
Too often, sales managers fail to disclose the price of the vehicle to be leased or the price a customer is given for the trade-in vehicle before negotiating the lease terms. In fact, prior to sending the transaction into finance, they may give the customer a single payment quote—down to the last cent and with specific terms—but the customer has no idea of what these payments are based on. Sales managers may mistakenly believe it is not their responsibility to disclose anything during the negotiation process, especially when they are leasing a vehicle. It is downright unethical for any member of any dealership team to withhold such information from trusting customers. Buyers and leasers alike are entitled to understand all costs associated with the sale or lease prior to the transaction going into the finance office. Make sure yourpersonnel understand this.
What else should full disclosure include? Customers should know they are responsible for maintaining full insurance on the leased vehicles, just as they would for a purchased one; this insurance should include bodily injury or death liability, property damage liability, and comprehensive and collision for the actual value of the vehicle, with no more than a $500 deductible. They should know what your dealership means by “normal” wear and tear, and what action your dealership will take for damage beyond the parameters of your written description. They should know the penalty you’ll exact for excessive mileage during the lease period, and for early termination of the lease. They should know what happens if the leased vehicle is totally destroyed in an accident or stolen, and the importance of investing in a gap insurance policy, if it isn’t already included in your lease contract.
It bears mentioning that a great many of your potential lease customers are just as savvy as those making a new or used vehicle purchase. They’re using the Internet with increasing know-how, and they can find the many sources advising them on how to effectively negotiate a vehicle lease. They know how to shop around and to walk away from any “deal” that doesn’t meet their expectations or needs. If your sales and finance managers aren’t as knowledgeable about these Web sites, they will likely lose a great many potential lease contracts. Again, full disclosure and honest communication are vital to transaction success and growing profits.
Menu Selling on a Leased Vehicle
Most finance managers know the importance of full disclosure when presenting the menu. They know the importance of consistency in presentation and that their effectiveness in building trust through matter-of-fact communication brings increased profits. Yet, too many of them are still avoiding the use of these skills. They are tied to the “old way” of doing business, thinking only of their potential commission and not of how customer satisfaction produces word-of-mouth marketing which is often far more valuable than newspaper ads; in other words, satisfied customers will produce greater commissions for them. They fail to realize that the same menu-selling strategies are needed for leased vehicles.
However, it is problematical for finance officers to endorse ethical business practices, if the rest of the dealership team doesn’t. How can a finance manager effectively and candidly present the menu, with all the pertinent buying information properly disclosed and options available, if the sales department hasn’t followed the same procedures? Full disclosure selling means that customers understand what they are paying for their vehicle prior to any other options being presented. The reason finance managers often give for not utilizing a menu on a lease transaction is their fear that customers will retaliate in some way, once they learn the real figures that the sales manager has not revealed during initial negotiations. They fear they will lose their creditability, and the potential sales and their commissions go down. Since they are only human, they avoid any potential conflict.
Ethical business practices begin on the lot the very minute customers are greeted. Every sales representatives and manager must understand that customers have the right to know the price of any vehicle they want to lease, just as if they were paying cash. Attorneys do not distinguish between cash, financed or leased deals. Your dealership personnel can avoid potential litigation by thoroughly knowing the law and by acquiring the skills needed to successfully (and ethically) negotiate a lease.
Vehicle leasing is a great way to increase business and customer satisfaction. Customer satisfaction always increases dealership profits. Customers like the opportunity to lease newer vehicles with more extras, at a price they can afford, and with fewer hassles and worries than traditional ownership. What steps should dealers take to inform their personnel about this rewarding business venture? They should enforce the practice of full disclosure of lease contract details, through the establishment of well-defined policies. They should insist upon a consistent sales approach that is based upon continuous education and upgrading of skills. Informed sales personnel and finance management will increase sales and profits. Informed customers will enjoy their leased vehicle and return to either purchase it or lease a newer model. Your lease business will grow exponentially, as will your company profits.
Dealers who want to succeed in the clearly profitable vehicle leasing business must first define their business goals and then clearly transmit them to their sales and finance personnel. It’s well worth the effort.
For more information contact Becky Chernek, president and CEO of Chernek Consulting, Inc. Her unique workshop methods offer a refreshing way for attendees to learn the subject matter and have proven to be more retention-effective over methods found in more traditional seminars. For more information, contact Becky through the following methods: Email: chernekconsulting@earthlink.net; Phone: 404-276-4026 (direct); Web site: www.ccitraining.info
Tags: Automotive Leasing, F&I Tips
on February 24th, 2008 at 1:13 pm
Please ignore my first submission as I’ve made a few corrections….
I applaud Professor Chernek’s February 5 article; Leasing in Today’s Market. I couldn’t agree more with her regarding a dealership’s responsibility regarding lease disclosures. However, the consumer must share equally in being responsible. Too often, consumers delegate their responsibilities to others and that carries a very high risk. For instance, every lessee should know how to create a simple one page lease proposal detailing MSRP, purchase price, gross cap, cap reduction, adjusted cap, cost of money (money factor/interest rate), payment, amounts due at lease signing, GAP coverage, disposal fee, purchase option, early termination criteria, mileage allowance, etc.. The information (e.g., cost of money, residual factor) necessary to make calculations should be provided in advance by the dealership so that the customer is well positioned to create an intelligent lease proposal and is able to make informed decisions. Once completed, the customer simply FAXES/emails the proposal to the dealer. There is no excuse for unpreparedness on the part of the consumer. Abdicating this responsibilty (e.g., computing lease payments) to a dealership may not be in the best interests of the consumer.
Salesmanship is a game that should and must be played fairly. However, customers must remember that dealerships, like any business, seek to maximize profit. This does not relieve the dealership of their responsibilty of fair and honest salesmanship as it must be done within the bounds of sound ethical practice. What is perceived as fair and equitable to one may not seem fair and equitable to another because individuals have different value systems. Ignorance usually carries a penalty. Our society tries to eliminate penalties associated with ignorance by making poor excuses for the unitiated or the misinformed or uninformed via litigation and that is wrong! If everyone were truly intelligent, responsible, and behaved rationally, there would be no need for federally mandated regulations like Reg. M or Reg. Z.
Reg. M, despite changes in 1998, still needs considerable work in the area of disclosure. In order for consumers to intelligently compute payments or create lease proposals that make good sense, certain information must be disclosed including cost of money (i.e., money factors, interest rates). Most fund providers use money factors, especially banks, while a few, like GMAC SmartLease, use interest rates. Currently, Reg. M does not require that the cost of money be disclosed. Their reasoning was that consumers would be confused. How presumptuous!!! How dare they presume that consumers would be confused! I’m not confused! As a consumer, I’m insulted and that makes me furious! Frankly, I believe that their reasoning is nothing more than a smoke screen or a poor excuse for non-disclosure. The retail automotive industry doesn’t want cost of money disclosed and their lobbyists in Washington worked very hard to insure that it didn’t happen! Fortunately, there are some retail leasing agents that voluntarily disclose money factors and residuals like LeaseCompare. I’m not advocating disclosure of the cost of credit in percent terms or an APR similar to that of Reg. Z. I’m simply asking that Reg. M require disclosure of the money factor or, in the case of GMAC, the interest rate used to compute the payment. Yes, it is an interest rate despite what leasing industry folks believe. An interest rate is defined as the rental rate paid for borrowed capital.
At any rate, no pun intended, a lease contract has traditionally been a contract of adhesion which means that it is a non-negotiable agreement between parties of unequal bargaining power. However, in order to craft a fair and equitable agreement and in the interests of fair gamesmanship, good faith bargaining demands that all parties have equal access to all pertinent information including cost of money, residual factors, etc. There can be no exceptions!
Another area of Reg. M that needs to be addressed is uniformity of calculations. Not all fund providers compute payments or early termination charges in the same way and there is nothing wrong with that as long as the methods used are actuarially sound and don’t violate accepted principles of financial mathematics. Unfortunately, some use actuarially unsound methods to compute lease payments. For instance, GMAC SmartLease computes their payments by discounting the residual one month nearer to the present. That makes absolutely no sense whatsoever. My guess is that they do it because they don’t charge a disposition fee. However most, if not all, of the finance captives don’t charge a disposition fee either. Up until five or six years ago, Ford Motor Credit (FMC) added 0.00110 to the capitalization (annuity) factor (which they called an acquisition factor) to account for their industry high acquisition fee. This meant that consumers would pay an additional $1.10 each month for every $1,000 of capitalized cost. So, a consumer with an adjusted cap of $26,000 would pay an additional $1.10 x 26 = $28.60 each month or $1,029.60 over a 36 month lease just to cover Ford’s acquisition fee. Ford has since discontinued this practice but I don’t believe it was due to Regulator pressure. My guess is that it was an internal decision. I understand that FMC now uses money factors instead of interest rates. Fifth Third Bank used an interest rate to compute lease payments in the same way that installment loan payments are computed. Therefore, lease payments were inflated by a factor or (1 + i) where i = annual interest rate/12. Again, this practice is actuarially unsound as lease payments are made at the beginning of the month (annuity due) and not deferred 30 days (ordinary annuity) as is typical with installment loans. I believe Fifth Third has discontinued this practice but, under current regulation, is certainly free to resume this practice at any time should they choose to do so. Perhaps what is needed is an Appendix similar to Reg. Z’s Appendix J that establishes computational standards. I’ll be happy to draft it!
Another area that needs to be reviewed is lease software. In those very few cases where the first payment is rolled into the lease or capitalized, I have discovered that the lease payment is calculated incorrectly. Fourteen months ago, I spoke with one software developer and, after considerable discussion, they finally agreed that their methodology was incorrect and agreed to correct it. As of today, they have yet to fix it! Recently, I wrote a yet to be published paper that addresses this issue. Most software developers use a two stage procedure to compute the payment which is clearly inappropriate. Hopefully, my paper clearly delineates the concerns emanating from inappropriate lease payment calculations that arise when using this two stage procedure and the need to carefully compute the appropriate sales tax liability. Inappropriate or skewed computations only serve to justify the rationale for incorporating standard computational methods in the Federal Reserve Board’s Regulation M paralleling those of its Regulation Z cousin.
Another concern is that dealerships need to EMPOWER their sales associates to make good business decisions. Knowledge is power and empowerment goes a long ways toward fostering ethical business practice. Dealerships should require sales candidates to have business finance degrees, train them, and above all PAY THEM to retain them; particularly the good ones! A sales person running back and forth to a sales manager for an hour or two is very bad business practice and reduces a sales person to the role of an order taker and adds to the frustration of the customer. Sales personnel need to be educated in the areas of financing and that includes leasing. Many can’t even compute a lease payment and that is absolutely disgraceful! When a sales person asks me what they can do to earn my business, I quickly tell them that they need to be honest and competent as I’m very direct and have no diplomacy whatsoever. And so, I have found that a one page lease proposal eliminates a lot of unnecessary conversation and saves a lot of time and money as well! Here’s a thought… as a good will gesture, perhaps dealerships could invite consumers to attend dealer sponsored seminars on consumer retail leasing a few times each year during slow periods like December or January. I gave a leasing seminar that was attended by 43 people and, according to the feedback, it was a smashing success! In a fiercely competitive market, dealerships need to find ways to reach out to the public. Educating customers may be an outstanding venue for attracting and keeping customers. Many will appreciate the gesture because so many of them want to learn. Ah, I know what you’re thinking… dealerships aren’t in the business of educating, right? You may want to re-think your position. The first step, though, is dealerships must have a highly educated and competent staff before they can help or educate others. Explaining to the customer that the “computer did it” just isn’t going to cut it anymore!
It should be painfully obvious to anyone that we need more change. Some people just can’t seem to do the right thing which is why we need laws and regulation. Many will try to get away with a much as they are able to get away with unless they have a strong inner constitution or laws regulating them to do otherwise.
Lastly, I won’t apologize for this long winded commentary because I think everything I’ve said, needed to be said.