The new vehicle leasing market is heating up as leasers offer more options and new car sales decline due to rising interest rates.

Zero percent financing and large cash rebates were the bait that brought car shoppers into dealerships the past few years. Now, instead of cut-rate financing, cut-rate leases are the attraction.

The way leases work, consumers pay a monthly amount based on the difference between the car's value when it's new and the "residual" value at the end of the lease. Automakers have their own "captive" financing firms and that's where some of the deals can be found.

"Interest rates are climbing, and it's easier to provide a subsidized residual that lowers the payments," says Tarry Shebesta, president of LeaseCompare.com. "Obviously the captives are pushing their programs on certain cars that they were once offering zero percent financing on."

Many automakers have scaled back sales incentives such as cash rebates and low-cost financing. In response, leasers of all types are offering flexible leasing periods and bargain prices in order to move vehicles.

The effort to move cars off the dealer lot is making the options more attractive in a competitive market with a steadily rising interest rate. Leasing provides what a traditional loan can't -- a higher-end car at a lower monthly cost.

Lease payments are lower than purchase payments because they're based on the purchase price minus the residual value, the amount the car can sell for when it comes off a lease. It also allows consumers to avoid a long-term investment on a depreciating item.

In a recent study by the marketing information firm J.D. Power and Associates, the car leasing market sits at a four-year high, with vehicle leases accounting for 21 percent of the new vehicle retail transactions from December 2005 through February 2006.

"One of the big breaks is an increase on the luxury vehicle side. The tilt is now more on leasing than on loans," says David Lo, manager of automotive finance for J.D. Power.

Leasing offers abound
"The car market has taken a dip in the last 12 months. Dealers who were once selling 300 units a month are seeing their sales drop to around 75 units sold per month," says Keli Hinnant, vehicle leasing supervisor at Navy Federal Credit Union, one of the largest credit unions in America.

Hinnant says that many captive leasers and their parent manufacturers are competing against credit unions and independent leasers to win leasing customers.

Consequently, Hinnant says that attractive interest rates offered by Navy Federal sometimes cannot beat what captive leasers are offering potential customers.

"The manufacturers have the luxury to play with the residual amount," she says. "We have to protect our assets. Dealerships are selling fewer cars -- in the new car market -- so they are trying to subsidize that by pushing financing at the dealer level."

However, a captive leasing company may not be able to provide other incentives such as shorter leasing terms or tax breaks.

Elaine Litwer, legislative coordinator for the National Vehicle Retail Association and owner of EL Leasing Corp., says that credit unions and independent leasers often provide better terms and mileage options to customers than captive lessors.

"You will find that if a consumer doesn't want to lease a car for the average 36 months, but rather wants 24 months or even 18 months, the leasers are providing those options," Litwer says. "It's not a cookie-cutter market anymore."