The days of the ultra-cheap lease are over.
After getting burned by losses, lenders have scaled back on super-low lease deals. Lease specials are still out there, but it may take some digging to find them. And they won’t be the rock-bottom deals folks enjoyed just three or four years ago.
For example, someone looking for a lease on a mid-sized passenger car in 1996 could find one with monthly payments as low as $200. Today, that same lease would require monthly payments of more than $300, says David McKay, director of auto finance at J.D. Power & Associates, a marketing information and consulting firm.
“I wouldn’t say there are no good lease deals around,” McKay says. “There’s not as many as there once were and they’re not quite as good, but they’re still there.”
Fierce competition in the leasing business drove down prices in the mid-’90s. With the auto manufacturers’ own lending subsidiaries leading the way, low monthly payments on leases became the norm. Customers snapped up the deals.
In a lease, a person pays the difference between what a car is worth today and what it is expected to be worth at the lease’s end, plus a monthly fee to the finance company. In leasing language, today’s value is called the “capitalized cost.” Tomorrow’s value is called the “residual value.” The lower the capitalized cost and the higher the residual value, the better deal it is for the consumer.
Lenders goofed by inflating residual
Lenders delivered the super-low deals of the mid-’90s by inflating residual values. Everything was fine until those leases came due a couple of years later. Few customers wanted to keep the car by paying its residual value, which was often $2,000 or $3,000 more than a car was worth.
“Customers are not dumb. Why would they buy that car?” asks Jay Meyerson, director of financial services at KPMG LLP, the firm that prepares the annual auto finance study for the
Consumer Bankers Association.
A substantial number of customers didn’t. In 1998, 39 percent of all leasing customers returned cars to lenders at the end of the lease, compared with 21 percent in 1995, Meyerson says.
Lenders took quite a hit. Since customers wouldn’t eat the difference between a car’s inflated residual value and its actual price, the lenders had to.
They took a loss on 71 percent of all full-term leases returned by customers in 1998. How big? An average of $1,878.
“They naturally don’t want to take too many hits,” says Fritz Elmendorf, a CBA spokesman.
So lenders have gotten more conservative in setting residual values and monthly payments have been bumped up. Lenders also are getting more aggressive in collecting fees for excess mileage and wear and tear.
“Look at things other than the monthly payment and try to identify what they’re going to be using the vehicle for and for how long and how far they’re going to drive,” says Glenn Forbes, vice president of Transportation Business Development at The Polk Company, an information and analysis firm. “Nail down exactly what you’re looking for and stick by it.”
One way to get an apples-to-apples comparison on lease deals is to compare them at no money down.
“All leases should be compared at zero down,” says Mark Eskeldson, an auto expert and author of
CarInfo.com, a consumer information and advocacy Web site. “If it isn’t a good deal with zero down, it’s not going to look any better when you give them a wheelbarrow full of money.”
Be sure to have a handle on leasing terminology before setting foot in a dealership. A
consumer brochure is available online from the Federal Reserve Board, or you could read the Bankrate.com
glossary of auto loan and leasing terms.
“There’s more information on new and used vehicles and on prices than there’s ever been by using the Internet,” McKay says.
Visit auto manufacturers’ Web sites and auto information sites such as
Edmund’s Automobile Buyers Guide,
Autopedia and MSN’s
CarPoint. Compare lease deals from banks and independent finance companies as well.
Remember, manufacturers and dealers run the best specials on their least popular cars and trucks. If you don’t care about looking cool behind the wheel, you should be able to find a good deal.
“All you have to do is look for an auto that’s not selling as good as anticipated,” McKay says.
If you’re nearing the end of the lease and you really like the car, you may want to consider negotiating a lower buyout price.
Experts say banks and independent finance companies are more likely to strike a deal than the captive finance companies of auto manufacturers such as
Ford Credit and
General Motors Acceptance Corp. It’s worth a shot.
“As long as you’re free to walk away, you’ve got negotiating power,” Elmendorf says. “Just because they’ve made the mistake of inflating the residual price doesn’t mean you’re obligated to pay it.”