Automakers put the brakes on incentive leasing
By Michelle Warren • Bankrate.com
Why are automakers backing off?
After years of wooing consumers with subsidized lease rates that
translate into low monthly payments, why the sudden about-face,
especially when the big three automakers are already losing market
share? It seems that's part of the problem.
GMAC and its counterparts provide loans to lessees
by borrowing from large institutional investors. These investors,
however, are increasingly uneasy about the drop in residual values
when it comes to GM, Chrysler and Ford products. With the continued
economic unrest south of the border, the underlying fear is that
one of the automotive giants could go belly up, leaving lenders
high and dry.
While this remains to be seen, the bottom line is
many automakers and their financing companies are losing money as
a result of incentive leasing, partly because the resale value of
used vehicles, especially those that guzzle gas, are down as much
as 25 percent. As a result, automakers are finding themselves awash
with used vehicles that have depreciated much more than the residual
value estimated at the outset of their leases.
What does this mean for lessees?
Beth Coggin, a GMAC spokesperson, says that despite cancelling the incentive program, the company will honour the terms of all current lessees.
The residual effects, however, will be felt when it
comes time to secure a new lease. Although the company will offer
standard rate leasing, it translates into higher payments and lower
vehicle values at the end of the lease. To compensate, GM is shifting
its focus to offer more attractive financing options with extended
rate low interest terms (zero percent for 72 months in some cases,
with $2,000 incentives for those willing to switch over from a lease).
In addition, in an effort to keep monthly payments down, some banks are offering longer-term loans for auto consumers, and
independent leasing companies could also negotiate with individual GM dealers to facilitate leases.
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