Economy stalls once-brisk business of auto leasing
Posted by rmezger August 10, 2008 02:00AM
blog.cleveland.com
With gas prices near record highs and a weak housing market keeping some contractors from buying, prices on new and used trucks are plummeting. That makes the vehicles very expensive to lease, so Chrysler decided to get out of leasing this month. Other automakers are cutting back on their usage of the financing option.
For many car buyers, a lease is the only way to get monthly payments to fit their budgets. But in the middle of the worst auto sales market in more than a decade, companies are backing away from that financing option.
If you were thinking about leasing a new Chrysler, Jeep or Dodge, you're out of luck. Chrysler LLC simply stopped leasing vehicles this month. None of the other major automakers followed suit, although all have said they're cutting back on leases.
For car buyers, finding a lease will be harder, and the monthly payments will be higher. Several car companies said they plan to tweak their sales incentives to keep vehicles moving out the door.
Consumers who had depended on short-term leases to drive new vehicles may have to turn to six-year car loans or the used-car market.
How a lease works
In a typical three-year lease agreement, the customer pays the difference between what the new car costs and what the seller believes it will be worth in three years, called the residual price. If a minivan costs $30,000, and the seller believes it will be worth $15,000 in three years, the person leasing the vehicle would pay $15,000 over three years, plus interest. At the end of the lease, he would have the option of paying the predicted $15,000 residual price to buy the vehicle.
What happened
Like everything else in the automotive world these days, it comes back to gasoline prices. When gas crossed the $4-per-gallon line, consumers turned away from gas guzzlers. Vehicles that automakers predicted would be worth $15,000 at the end of leases were worth $10,000. Instead of buying them at the end of their leases, customers turned them back in to the dealers. Companies had to eat the $5,000 difference.
PICKUPS
Value of average used pickup, June 2007: $11,716.
Value of average used pickup, June 2008: $8,513.
Difference: -27 percent
In addition to high gas prices, a weak housing market has hit pickups. With few houses being built, contractors don't need new trucks.
Leasing had been popular in this segment because work trucks can get very expensive and resale values used to be high. High resale values meant the difference between the new price and the expected used price was small, making monthly lease payments cheap.
Car companies made things even more attractive by offering low-interest leases and increasing expected resale values. Plummeting truck prices have killed those practices. So, monthly truck payments on new leases are much higher than they were a year ago. Even without changing incentives, Ford noted this month that leasing has become much less popular than it was a year ago.
SPORT UTILITY VEHICLES
Value of average used SUV, June 2007: $13,674.
Value of average used SUV, June 2008: $10,507.
Difference: -23 percent
The market for SUVs has been declining for five years, but high gas prices have nearly killed what was once the most profitable segment for the auto industry.
As with trucks, leasing was popular with SUVs because of the high vehicle prices. SUVs typically kept less of their value than trucks, so leasing wasn't as cheap. Because the expected resale values of new SUVs have fallen so much, new leases on them will be very expensive. Carmakers said the difference in monthly payments between a leased vehicle and a new one purchased with a six-year loan will be minimal, driving more customers to buy.
LUXURY VEHICLES
Value of average used luxury car, June 2007: $13,922.
Value of average used luxury car, June 2008: $13,380.
Difference: -4 percent
Value of average used luxury SUV, June 2007: $21,011.
Value of average used luxury SUV, June 2008: $17,343.
Difference: -17 percent
Leasing is the backbone of the luxury market. Many drivers of BMWs, Cadillacs and Lincolns could not afford to buy those vehicles, but leasing brings monthly payments down to a more reasonable level. During the ongoing market downturn, used luxury car prices have fallen only slightly, so leasing luxury cars probably won't change much. Luxury SUVs, on the other hand, have fallen with the rest of the market, so expect higher lease payments for Escalades and Navigators.
Fuel-efficient cars
Leasing has never been as popular for economy cars as it has been for larger vehicles. With low starting prices and low resale values, the difference in monthly payments between a lease and a purchase was minimal.
But for the extremely small number of people who did lease vehicles such as the Toyota Prius, there's good news. A year-old Prius is worth 26 percent more than a year ago, putting the price of a used one within $1,000 of the price of a new model. So, consumers facing the end of a three-year lease on a Prius could have the option to pay $17,000 for a vehicle that would cost $22,000 or more on the used-car market.
What the companies are doing
Chrysler LLC
Chrysler stopped leasing vehicles Aug. 1. As a privately held company, it does not have to say how much it lost on leases, but industry watchers said the figure is likely in the billions of dollars this year.
Ford Motor Co.
Ford lost $2.1 billion on leases during the second quarter of this year. The company plans to continue offering discounted leases on some luxury vehicles, but it is cutting leasing incentives in most other areas.
General Motors Corp.
GM lost $2 billion in the second quarter on leases, and its partially owned financial services provider, GMAC, lost money as well. GM is getting out of leasing in Canada and will use a strategy similar to Ford's in the United States.
Toyota Motor Co.
About one-third of Lexus drivers lease their vehicles, versus about one-sixth of Toyota drivers. Japan's largest automaker said it is comfortable with its leasing strategies, but it continues to watch the market for changes.
Honda Motor Co.
Honda has no plans to change its leasing strategies. Honda's resale values are among the highest in the automotive industry, making it relatively inexpensive and popular to lease its vehicles.
Nissan Motor Co.
Nissan has no major plans to change its leasing strategies. Like other automakers, it plans to offer more incentives on buying instead of leasing, but it expects to continue offering leases in most markets.
BMW
About 60 percent of BMW drivers lease their vehicles. Spokesman Tom Kowaleski said the company wants to shift more people into buying the cars by offering more financing packages, but leasing continues to be the lifeblood of the luxury market.
What this means for buyers
For years, many consumer finance experts have recommended against leasing. If you can't afford to make loan payments on a car, that means you can't afford it, not that you should lease it, said Jean Ann Fox, director of consumer protection for the Consumer Federation of America.
"If the car companies are re-examining leasing for their own financial reasons," she said, "that's a great opportunity for consumers to reconsider their use of leases."
Fox recommends buyers get financing before they shop for cars so they know how much of a loan they can afford. That way, they don't look at vehicles that they could afford to drive only through leasing.
"These days, you don't want to obligate yourself to living above your means," Fox said. She added that six-year car loans aren't much better than leases. The long terms mean consumers will quickly owe more on their vehicles than the vehicles are worth.
Why this is bad for car companies
Cutting back on leases causes two problems for automakers:
# It puts some vehicles out of the financial reach of many buyers.
# It could depress future sales.
Tom Kontos, chief economist for auto auction company Adesa Inc., which provided the average used-car prices used in this story, said lease customers are predictable.
"A loan, especially a 72-month, keeps someone out of the market for six or seven years," he said. "With a lease, you pretty much had a guaranteed customer every three years."
Categories: Autos, Breaking News, Impact, Personal finance
Comments
mg29 says...
Americans are sometimes their own worst enemy by spending $2 for every $1 they earn. Plus $4 / gallon and equally insane prices for natural gas has been the death knell for our economy and way of life.
Posted on 08/10/08 at 8:17AM
alexcams says...
You would think that in the process of writing this story that someone at the paper might notice one of the many ways a lease is better than a traditional bank loan (you're not stuck with a vehicle whose resale value has collapsed), but that doesn't seem to have happened.
There may be some people for whom leasing is a mistake, but for many other people it's a boon. If you can afford to pay, say, $500 a month for transportation and are willing to do that forever a lease allows you to have a better car than a loan. If you can afford to pay, say $650 a month for transportation a lease lets you have the same car for less and you can invest the difference to help you finance a new vehicle (or even buy the old one) at lease end.
If you manage your money correctly, leasing a car is a gift. Remember that the car companies want to end leasing because it's bad for them and good for the consumer. That ought to tell you something.
Alex Law, www.CarAdviceForWomen.com
Posted on 08/10/08 at 9:28AM
alexcams says...
You would think that in the process of writing this story that someone at the paper might notice one of the many ways a lease is better than a traditional bank loan (you're not stuck with a vehicle whose resale value has collapsed), but that doesn't seem to have happened.
There may be some people for whom leasing is a mistake, but for many other people it's a boon. If you can afford to pay, say, $500 a month for transportation and are willing to do that forever a lease allows you to have a better car than a loan. If you can afford to pay, say $650 a month for transportation a lease lets you have the same car for less and you can invest the difference to help you finance a new vehicle (or even buy the old one) at lease end.
If you manage your money correctly, leasing a car is a gift. Remember that the car companies want to end leasing because it's bad for them and good for the consumer. That ought to tell you something.
Alex Law, www.CarAdviceForWomen.com
Posted on 08/10/08 at 9:28AM
alexcams says...
You would think that in the process of writing this story that someone at the paper might notice one of the many ways a lease is better than a traditional bank loan (you're not stuck with a vehicle whose resale value has collapsed), but that doesn't seem to have happened.
There may be some people for whom leasing is a mistake, but for many other people it's a boon. If you can afford to pay, say, $500 a month for transportation and are willing to do that forever a lease allows you to have a better car than a loan. If you can afford to pay, say $650 a month for transportation a lease lets you have the same car for less and you can invest the difference to help you finance a new vehicle (or even buy the old one) at lease end.
If you manage your money correctly, leasing a car is a gift. Remember that the car companies want to end leasing because it's bad for them and good for the consumer. That ought to tell you something.
Alex Law, www.CarAdviceForWomen.com
Posted on 08/10/08 at 9:28AM
mrfixit2005 says...
alex,
if you need to spend 5-650 a month on a vehicle that is a problem.
why have payments forever ?
Posted on 08/10/08 at 10:17AM
rpuck says...
2006 48.000 suv with 12k miles under 20k....thank you lessor and car company
Posted on 08/10/08 at 11:10AM
unfair13 says...
Leasing is not dead! Someone can walk into one of these dealers today and lease a vehicle. The lease would be through a local bank . The biggest change you'll see with Chrysler, Jeep and Dodge vehciles are the lease incentives are gone. I sure wish the Plain Dealer would write a truly accurate article. For anyone who wants to lease a vehicle they will stay away from all all Dodge, Chrysler and Jeep dealers because of this article.
Posted on 08/10/08 at 12:10PM
Buckeyebobby says...
Sucks for me as I've been leasing Jeeps for 15 years. I recieved a letter from the dealership last week that they will no longer offer leases. I live 4 miles from work and I fish weekends during the steelhead season. I don't rack up a lot of miles and I wanted a new vehicle every 3 years.
I can see why Chrysler is doing it as they're losing their shirts on SUVs and pickups coming back on leases. I still have 6 months left on my lease and I might haggle with the dealership to buy it.
Posted on 08/10/08 at 3:10PM
bankert says...
alexcams: if you think leasing is a "gift" and a "boon", I'm sure glad you are managing your money and hopefully, noone else's.
Posted on 08/10/08 at 3:57PM
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