Used-car leases lucrative for dealers, but not customers

Car dealers have found a new way to profit from people with money trouble: leasing them hand-me-down vehicles.

The deals are pitched to customers as the cheapest way to drive a used car off the lot, with the added benefit of an easy escape for those who can’t keep up with the payments.

Few customers are told about the advantages on the other side of the trade. Leases can allow dealerships to sidestep interest rate caps, and there are fewer financial disclosures rules than with a conventional car loan.

The dealers get a tax advantage: They can pay income tax on the sale over time, instead of in a lump sum upfront.

When payments are missed, repossession is a snap because the dealer still owns the car. And lease terms, unlike auto-loan payments, cannot be reduced by a Bankruptcy Court judge.

These benefits have led thousands of used-car dealers, including many in the lucrative in-house financing sector known as Buy Here Pay Here, to move into leasing, industry sources say.

As with Buy Here Pay Here, the leasing business caters to the millions of Americans who have been forced by a sour economy to make do with less.

“In the last few years, this has really taken off,” said Al Lentsch of Burnsville, Minn., who helps dealerships set up and run leasing programs. “Dealers are finally getting used to the idea that what we do is legal.”

Traditionally, the auto-leasing business focused on people with good credit who want brand-new cars but don’t want to part with a lot of cash, or who prefer not to keep a car more than a few years.

The advertised deals — such as $179 a month for a new Honda Civic — can seem like a bargain, but these rates are usually available only to people with top-notch credit.

The used-car leasing business works the other side of the street: people who are just scraping by, but need a car to get to work.

Lentsch said his company, Northland Auto Enterprises, counts 2,744 dealers as clients — nearly double his numbers from 2007 and up almost 30% in the last year. He promotes his services at dealer trade shows, selling what he calls a “turnkey” operation with contracts, software and insurance for used-car leasing.

Competitors include LHPH, a name drawn from the industry term Lease Here Pay Here.

“More profit ... bankruptcy friendly ... repo friendly ... customer has to return the car to you at lease end,” reads an online pitch to dealers from LHPH, which was founded in 2009 in San Diego and now has $10 million in used-car leases on the road. “Leasing makes sense.”

Michael Yslas of Lakewood, who sells bowling equipment, wound up leasing a 2001 Chevrolet Silverado pickup after being turned down for several new-car loans because of unpaid medical bills that hurt his credit rating.

He came to regret the lease, saying the $1,500 upfront fee and monthly payments of $411.56 were excessive for a truck with 139,000 miles on the odometer.

“My thinking was that if I lose that truck, I lose my job,” Yslas, 40, said of his initial decision.

His boss eventually helped him find a better deal on a car, but Yslas said that when he tried to cancel the lease, Coast to Coast Motor Cars in Costa Mesa pressured him to lease a Mercedes-Benz instead and harassed him with threatening phone calls when he declined.

Yslas filed suit in Los Angeles County Superior Court last month over the dealership’s practices. The case is pending.

Mark Youngblood, owner of Coast to Coast, declined to discuss the dispute because of the litigation, but said that he tries his best to work with customers when they miss payments, and lets them walk away if they run into financial problems and are current on payments.

“Yes, I make money, but I also give people an option they didn’t have and a nice vehicle at the same time,” Youngblood said. “This is meant to be a short-term solution for people who are in a bad situation.”

Chad Carlisle, general manager of Damron Motorcycle Co. in Lubbock, Tex., switched to leasing in 2007 after a dozen years running Buy Here Pay Here lots, which sell cars with high-interest loans to people with credit trouble. Despite its name, Damron’s primary business is now used-car leasing.

Each lease starts with a nonrefundable “activation fee,” and Carlisle said most customers swap cars every eight months or so, generating another fee. A typical car is leased to four or five people, he said; flipping the same car 10 times is not unheard of.

“There are a lot of benefits of this program,” Carlisle said. “Any dealer not doing this doesn’t know what he’s missing.”

Count taxes among the benefits. In most states, the dealer collects the sales tax in full from the buyer as part of the money down and passes it on to the state. In a lease, the dealer can pay the sales tax gradually over the life of the contract, which allows him to keep more of the customer’s down payment.

Dealers also must pay income tax on the difference between their acquisition cost of a car and its sales price for the tax year in which it was sold. Not so for a lease. Income taxes are paid only on the incremental profit on each lease payment.

The net result of the tax benefits saves leasing dealers between $600 and $800 on every car they sell, said Randall McCathren, managing director of the Assn. of Consumer Vehicle Lessors, a Nashville consulting group.

The tax advantages can extend to consumers. In Missouri, individuals pay sales tax on a car directly to the state rather than through the dealership.

That led Betty Boxley, 63, of St. Louis to lease a 6-year-old Ford Taurus with 108,000 miles for $300 upfront and payments of $200 every two weeks.

One night, Boxley’s Taurus wouldn’t start. She had missed a payment, and the dealer had remotely shut down the ignition system.

“I got paid late that week,” Boxley said. “You make the car payment real fast at that point.”

When customers don’t pay, another of leasing’s advantages emerges.

In most states, when a buyer defaults on a car loan, the lender must send a formal notice before repossessing. In a lease, the title never changes, so no notice is required and dealers can repossess at will.

Some leasing dealers admonish customers that if they don’t keep up with payments, they could be arrested for possession of stolen property.

“Clearly it’s grand theft,” said Trooper Earle, president of Premier Companies, a rent-to-own furniture chain in Williamsburg, Va., that has opened seven used-car leasing lots in Missouri and Florida in the last three years.

Bill Brauch, director of the Iowa attorney general’s consumer protection division, said such threats are baseless, because most prosecutors consider these civil disputes. But he said it’s an indication that people need to think hard about a used-car lease.

“This is an industry that’s always looking for an opening to try to avoid consumer protection laws,” Brauch said. “None of the statutes contemplated leasing when they were written.”

Historically, leasing has been dominated by new cars, in particular high-end machines like Mercedes-Benz or BMW, where the dealership can reliably predict what the value will be after three or four years. The monthly payment is largely tied to what the car will fetch when the lease is over, known as the residual value.

But with high-mileage clunkers, predicting what the car will be worth after more years of wear and tear is sheer guesswork, according to new-car leasing specialists.

That has led to lawsuits alleging that some used-car leases are shams because the security deposits and monthly payments have no relation to the car’s actual value. These suits contend that the leases are really just sales in disguise.

Kai Harris of Michigan sued Detroit II Automobiles in May, alleging in a federal court suit that she could have bought a 2008 Jeep Patriot for significantly less than what she paid on the lease: $2,000 upfront and weekly payments of $124 over three years.

The lease, she contended, amounts to an interest rate of 38.5% when state law would have limited an auto loan on the Jeep to 25%.

“That’s not a lease, that’s an overpriced sale,” said Adam Taub, Harris’ lawyer. “It’s a deeply unfair arrangement.”

The dealership, which settled for undisclosed terms in July, declined to comment.

ken.bensinger@latimes.com