Pseudo leases in Israel

ImageWe received a request for clarification last week 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 the request 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 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 have really only 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 all over the world 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.

Dealers new and used 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. We have a  30 minute video explaining leasing at this link if you want to learn more.

They call it a “lease” it may not be a lease at all

ImageWhat passes as a car lease today in Israel many times is not a lease at all; it’s a residual note or balloon financing plan.  To be clear, we have these types of plans too and some of our customers opt for them; we call it LAP (lease alternative purchase).  There are indeed circumstances where this is the best option.  The difference is our clients know exactly how the plan works and their responsibilities at the end of the contract.

The difficulty today is that new car dealers and local banks are selling these balloon finance plans as “leases” and we English speakers from the west are expecting a very different reality when we hear the word lease.  Simple rule of thumb, if the car is put in your name it’s not a real lease.

Why Are Israeli Dealers Promoting These Plans?

#1.  It sells cars.  Payments using this plan are cheaper than conventional 60 month purchase contracts.

#2.  It’s also a cash flow issue.  The dealer receives all the money for the car at closing from the bank-because you are ultimately responsible for it.   In a real lease the residual value of the car is not paid to the lease company they must carry this value on their books until the end of the contract.

In a real American style lease, which is what you are probably accustomed to and is what we suggest in most instances, the lease company is the bank.  They will agree to let you have use of the car in turn you will make the the scheduled payments  while they hold the remaining 48-62% residual balance on their books at no charge to you.  At contracts end, if you do not exercise your option to buy it, then the leasing company will sell the car to recoup the rest of their investment.   This is a  very important feature for you.

Another Variation

There is another kind of lease being sold today by some lease companies.  This plan is more comparable to an American style Lease in that the car remains the property of the company, but there is a small catch.  You have no obligation at the end of the contract if you take another lease contract.  Should you not contract with them again, the chickens will come home to roost — you will have penalties.  You must read the fine print.

They are pushing these plans today, not for your benefit but for theirs.  Be careful to ask a lot of questions.

The reasons you are taking or at least considering a lease beyond the affordability is:

  • Protection from rapid and certain asset depreciation
  • Avoiding the hassle of liquidation of the car when it has finished its service for you.

It would be a shame to find out at the end of the contract that you accomplished neither, due to a misunderstanding of what you were actually signing. If you require an  American style lease, one which allows you to walk away at the end with no further obligations, should you desire to do so, please visit this link where you will find new and used cars for lease just like the ones you were accustomed to in the West. 

Leasing and Its Perceived Black Eye

Leasing and Its Perceived Black Eye

It’s ironic that leasing has such detractions associated with it, when in reality it’s probably the most useful tool we have to maintain a vehicle for our personal use.  We have listed three reasons we think leasing gets a bad reputation from those not familiar with the benefits.

Non-Ownership – It’s possible that there is a comfort level we experience with ownership, which is absent in leasing, that is off putting; however that comfort or familiarity comes at a price.  With ownership you experience a brisk depreciation of your asset and must you engage in the process of selling the vehicle when it has completed its service.

You must ask yourself what you are trying to achieve.  Do you want to own another asset, or do you want to make use of an asset in the most economical way possible?  If it’s the second, then ownership is not necessarily the best option.

Remember this: no one really buys a car. They really buy its use, which is why as soon as its usefulness is diminished they sell it.

No equity Build-up: This is a big misconception to which we devote a full page. It’s called “Elephant in the Room and No One is Talking About It” please visit that page. It should clear some of the reservations people usually voice.

Common Misuse of the Program:  Maybe it’s because leasing was initially designed by manufacturers to move an ever price-increasing inventory, or in our opinion, the reluctance to considering leasing is a result of what the popular western culture morphed leasing into.  Pop culture used the affordability to enhance their perceived net worth, to look more affluent.

Leasing made it possible for someone who could normally only afford a Toyota to drive a Lexus, or if you had a Nissan Maxima level salary you could now drive an entry level Infinity.  We call this “plastic fantastic” because it’s all about the show, but it’s not the same here in Israel.

In Israel we live within a more reality-based existence, we don’t experience the same “keeping up with the Jones/Cohen’s” phenomenon that we did in the west.  Here leasing is more a function of protection of assets than that of embellishment of financial or social stature.

Our income generation here in Israel is not at the same level as it was in the west and our cost of living is more.  Leasing gives us the ability to pay only for the use of the car and protects our cash reserves at the same time.  Down payments are less as are the monthly payments.  Since leasing is for new or 1-3 year old used cars we experience less repairs, enjoy better fuel consumption’s and best of all the depreciation that all cars experience are no longer factors. Visit our site please at this link Ianglo Leasing to continue your investigation of this fantastic financing option.