Beware some used-car leases

LOS ANGELES – 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 disclosure 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 up front.

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 percent in the past 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, Calif., 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, Calif., 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 in November 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.”