A friend recently wanted my advice on leasing a new car.
I've only leased a car once, but I knew enough to want to put zero cash down.
I let the lender bear the depreciation risk. But many customers don't know about that risk, and I imagine only some dealerships explain it to them.
So should a finance and insurance officer or a salesperson explain the risks of a big down payment to a lease customer?
That's the ethical question that Mike Conn, business manager at Dreyer & Reinbold dealership group in Greenwood, Ind., posed to his F&I peers on Facebook in a post expressing concern that a customer used his entire trade equity of $9,500 to reduce a lease on a $25,000 car.
Interestingly, many of Conn's peers who commented either didn't have a firm grasp of the issue or definite direction for their moral compass.
Here's the thing: Making a large down payment on a lease does not benefit the customer.
With a zero down payment, if the customer walks away at the end of the lease term, he got a two- or three-year test drive, with the lender taking the depreciation risks. Sometimes the car is a good buy at the end of lease, but often it's not, so if the customer put a lot of cash into that lease, that's money he will never see again with no trade equity.
And then there's the concern Conn expressed: What if a customer totals the car before the lease ends?
While the customer often will not be out any additional cash because the contract typically is protected by GAP, all the money the customer put in the down payment will be gone. Insurance money will be used to pay off the lease, not to the customer.
Some of Conn's peers wrote that certain financiers put a cap on the amount of capital reduction a customer can put on a lease.
Still others wrote they do explain the risks of a large down payment to customers because doing so creates trust. Wrote one manager: "They know you're looking out for their best interests, and they feel good when they get a check handed back to them. The beauty of having all that cash in hand is that if the resulting payment is too steep for them after you've suggested product, they can always dip a little into that cash to make it a little more palatable."
But in Conn's situation, neither he nor his salesperson told the customer what a "horrible mistake" the customer was making at the time.
Wrote Conn: "I just crossed my fingers and said a little prayer that the customer doesn't total the car."