New incentives heat up auto leasing -- Page 2

Leasing is nice for manufacturers
Automobile manufacturers face tough numbers in 2005: Of the 180 million licensed drivers in the United States, only 2.7 percent of those are in the market for a vehicle each day, according to Perleberg. What's more, the brass are pushing for 7 percent to 8 percent increase in production this year, which means dealers will have 19 million cars for 15 million buyers.

So at the very least, leasing's lower payments equal higher foot traffic through the dealerships, says John Honiotes, vice president of Autobytel.com.

And with the advent of certified pre-owned used cars, manufacturers want their vehicles back under their roofs in three years, when these cars reach prime resale value. Add in the fact that used car values are stabilizing. At the beginning of this decade, manufacturers lost as much as $10,000 in estimated profits at auction when the bottom fell out of the market. Car manufacturers will do all they can to ensure a stable pool of eligible cars in 2008 when today's leases come to an end.

Don't underestimate leasing's ability to create a captive audience, as well. At the very least, dealers get first crack at keeping their previous customers who want to break or renew a lease, says Honiotes.

Perhaps more importantly, this angle helps to solve the incentive mess manufacturers dug for themselves with zero-percent financing and ever-spiraling rebate deals. They started in the 1980s with Lee Iacocca's "buy a car, get a check" $50 rebate campaign -- by May 2005, the statistics were up to $5,100 per vehicle in giveaways. "Nothing gets people off of looking at the size of the discount more than giving them a very low monthly payment," Spinella says.

For some models, leasing deals become the proverbial coupon of the car industry -- a tried-and-true way to get stock off the lot before the newer, more attractive body styles roll in.

Be an educated shopper
Consumers wield the power. To date, drivers have used their influence to get shorter leasing contracts (think 24- to 36-month leases) that feature more customized options in areas such as mileage, says Chung. And thanks to the Federal Reserve's insistence, those legal documents are far easier to read and understand in 2005 than they were in 1995.

But the tired adage about doing your homework continues to apply. Leasing contracts still insist on low mileage -- the better for manufacturers to keep that residual high for resale -- so if you can't predict your annual miles "you shouldn't be looking at leasing regardless of the program out there," Honiotes says.

Before you commit in writing, realize that there's still interest baked into the lease payments. Ask the dealer to provide the interest rate at which he is calculating the lease. You also need to be comfortable with the leased vehicle's capitalized cost, which, for all practical purposes, is the selling price on which he bases the monthly payments. It's guaranteed to be different than the car's sticker purchase price.

"We're seeing a lot more leases with higher cap costs," says Chung. "It's definitely a way to lure the consumer into a false sense of security by saying, 'You can get this Mercedes, for example, for $299 a month.' But if you need to put down $5,000 to reduce the cap cost to reach that payment, it's really not that great of a promotion. The consumer really needs to do her due diligence."

Honiotes recommends pushing to see if the dealer will apply the model's rebate dollars to that cap cost. "Car dealers these days respect an educated buyer. They treat them with more respect and better deals."