Recently we received a request for clarification regarding the pseudo leases offered by Israeli dealers. Since this is a common question we decided to post the reply in a blog. We have paraphrased and split the request into sections to enable us to elaborate on points individually.
Question: A relative recently did a dealer purchase. He mentioned his deal was apparently similar to a lease where he could put down 15-30% of the price.
Response: 15-30% down why so much? The whole concept behind leasing, or in this case similar to leasing, is to conserve cash. A real American style closed end lease should require no more than 8% down for most cars offered today.
Question: After the 30 monthly payments the loan balance is about 50% of the original price, but the expected value is perhaps about 75%.
Response: For a salesperson to make the suggestion that a car possibly will enjoy a 75% retention of its original value is pure salesmanship, it’s laughable. The most aggressive residual value issued from leasing companies today (who are managers of large fleets and know the market intimately) is only 64% and this is on just one specific model from one manufacturer. The average forecast residual amount at the end of 30 months for most popular cars is 56-60%, a long stretch from a suggested 75%.
Question: The dealer guarantees to buy it for market price
We underlined this portion in the question for this is a remarkable promise. Anyone in Israel who has attempted to trade in their car when buying a new car from a dealership, has been exasperated by the amount offered for their trade-in.
This will be the same scenario; the new car dealer cannot pay the market value. They have to sell the car to a used car facility when you trade it in because dealers here in Israel do not have used car departments. The used car company even if affiliated with the new car dealer franchise is a separate company and as such needs to buy from the new car dealer at a low level to make a profit. The used car facility doesn’t have any connection to the selling dealers promise.
Question: use the net proceeds toward a new vehicle and start over, or pay the loan and own the car outright, or or sell the car on his own.
Response: “net proceeds” there cannot be net proceeds; “towards a new vehicle” this is the catch. You are now trapped you cannot move to another make. You want the guarantee buyback at his stated fair market value; you must stay with his brand. What if in 30 months you no longer need a car? Maybe you now work for a company that supplies a vehicle; your promised guarantee won’t work. What’s the dealer going to do with a used car that he supposedly paid fair market price for? What if you decide to buy used next time? Same problem no guarantee. This promise only can be useful if you intend to purchase new from the same manufacturer and from the same dealer.
Summary: You only have two real options when you take this pseudo lease. The first is to sell the car yourself but then that is not really a guarantee. Second is to buy new from your selling dealer again and on paper he can show you the numbers for your trade that you are looking for. This is possible by holding on the sale price of the next car that you’re going to be taking. Dealers the world over have been doing this for decades but there comes a time when you the customer will find you are unable to make this type trade again. Eventually you will be so far “in the bucket” “upside down” that your only option is to sell it by yourself and maybe even then at a loss.
New and Used dealers cannot offer fair market value for cars, they all consider trade ins a service. To stay out of the fray and enjoy low monthly payments the real solution is a closed end American style lease.