Leasing’s Sneaky Tricks — Part 3 of 3

If you don’t know how leasing can hide sneaky tricks in their finance agreements, you may find out that you agreed to pay WAY too much money – certainly, a lot more than you ever figured.

I want to show you what to look out for so you can protect yourself from these unsavory practices.

In this part of the three-part series, I will cover:

Sneaky Trick #7 – The “Last-Minute” Addendum to be Approved by the Directors 

Sneaky Trick #8 — Unlike Our Competitors, We Take a Bigger Residual Position in Our FMV Lease

Moral

Fore-warned is fore-armed. Your best defense against sneaky tricks is your own expertise. The next best thing is to work with a computer source (yes, like Source Data Products) that knows all the tricks and has a built-in incentive to protect you from them…because they depend on your loyalty over the long term — lease after lease. Beware of “strategic partners” that are more interested in quick bucks than in long-term business relationships. You might be thinking “partnership” but they are pursuing their own strategy. Guess who is going to “get the business.”  

Sneaky Trick #7 — The “Last-Minute” Addendum to be Approved by the Directors

When a lessor presents a last-minute document to be approved by the directors, an alarm should go off. First, you should have all your documents well in advance for your attorney and financial advisor to approve. A notorious leasing company had a practice of “last-minute” addenda to be approved by the directors. Many lenders require that an authorized body, like the directors, must approve a lease. 

This devious leasing company had sneaky clauses for FMV determination, auto renewal and termination notification — but hid them in a last-minute addendum so they would not be discovered during the initial lease review. Once the board approved the lease in writing, they rushed it through because it was “last minute.” Five years later, they discovered they had entered into a binding legal contract with all the “gotchas.” In 2000, the Wall Street Journal had an article exposing this notorious leasing company. It had over 150 lawsuits pending — and they won every one of them because the addendum was approved by the board of directors. Oops, gotcha again!  

Sneaky Trick #8 — Unlike Our Competitors, We Take a Bigger Residual in Our FMV Lease

How can this monthly payment be so low? The leasing representative calmly explains, “We think this latest computer is so hot, and we are so bullish, that we have taken a bigger residual position in our FMV lease. Everybody else only has a residual of 5% but we believe 20% is more realistic.”

What the lessor is saying is that everyone else offers FMV leases where you pay 95% of the product value over 5 years, while they bill you only 80% over 5 years. Clearly, if you only pay 80% instead of 95% you have lower payments.

What they are not telling you is that there are clauses in the lease that compel you to lease your next computer from them in 3–5 years, when you get your next computer. At that time, that 20% residual gets rolled into your next lease and you don’t have a way to figure it out.

Example:    

1st Computer

$ 100,000     95% over 5 years at 5%        $1792.77

                     80% over 5 year at 5%          $1509.70

                     $20,000 Residual with 80 %  FMV

2nd Computer (3 years later)

$75,000    You have paid about $54,350 of you 5 year lease

                 You have a balance of $36,232 to pay and you want a new $75,000 computer

                 You don’t pay $36,232 + $75,000 = $111,232, or $2099 over 60 months

                 Instead, you pay $36,232 + $20,000 Residual + 80% of 75,000, i.e.,

                 $36,232 + $20,000 + 60,000 = $116,232, or $2194 over 60 months

Please forgive my slight-of-hand in this example. I wanted to show you that you could have to pay for the $20,000 residual risk you thought the leasing company was taking (actually, you had the $20,000 risk all along). It could have also taken another 20% residual position in the lease and the difference in the lease payments would be a negligible $100 per month. And the leasing company picks up a free $116,232 - $111,232, or $5,000 in addition to the profit it makes on the lease.  

This is really clever. The leasing company would give you a monthly charge for this blended lease for a short period (3 years), knowing that you would likely extend it (because you had already told them of your 5-year plan).

Need help evaluating your lease financing? Call me 714-593-0387 or email me [email protected]. I would be glad to help.