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Lease-here, pay-here is a growing segment of the buy-here, pay-here business, but risks come with its advantages.
Attendees at the recent National Alliance of Buy-Here, Pay-Here Dealers heard about the pluses and minuses of keeping the titles of their customers’ vehicles.
Lease-here, pay-here provides income tax advantages, said Ken Shilson, a Houston CPA and NABD’s founder.
It allows sales tax deferment in some states, he said. But the option becomes less attractive without that ability.
Rick Potter, director of CAR Financial, said lease-here, pay-here is definitely gaining momentum, but many buy-here, pay-here creditors lack understanding of the product.
Buying lease contracts is a much more narrow market, Shilson said.
The legal pitfalls enter when dealers confuse leases with traditional installment sales, said attorney Tom Buiteweg of the Hudson Cook law firm.
Dealers must make it clear to customers that they’re leasing a vehicle, rather than buying it, he said.
The biggest differences come at the beginning and end of the lease.
The amount due at signing and the monthly payment calculations are the key disclosures of leasing, Buiteweg said.
End-of-term differs from the final installment in a traditional sales contract. Customers can buy their cars at end-of-term, but this is another sale, not a contract pay off, Buiteweg said.
Dealers need software to compute both the correct purchase amount and an early termination amount.
Another issue at end-of-term is wear-and-tear and excess mileage fees. The mileage penalty leads some consumers to tamper with a vehicle’s odometer.
“But you won’t know what’s going on with the odometer because it’s been out of your possession,” Buiteweg said.
The burden for providing odometer information falls on the driver.
While the consumer carries most of the operational requirements, dealers who act as lessors will want to keep a close eye on what’s essentially their property.
Recent federal law eliminated vicarious liability for the most part, Buiteweg said, but owner liability remains. The penalty amounts are capped, but dealer-lessors should use caution.
They’ll want notification for traffic violations and tax payments.
Ensuring drivers possess both collision and liability insurance is crucial, Buiteweg said. Dealers might want to repossess a vehicle if the liability insurance lapses.
Shilson recommends dabbling in lease-here, pay-here before making a significant business model shift.
“You’ll still have many of the challenges you had before,” he said. |
