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Troubles in the U.S. credit markets may have an impact on how you buy your next car or truck.
Leases subsidized by manufacturers -- those deals that make a lot of luxury vehicles affordable on a
monthly payment basis for many consumers -- may become highly restricted.
Chrysler Financial has announced it is pulling out of the lease financing business. GMAC Financial
Services -- the largest auto financing company in the United States -- and Ford Motor Credit Co. have said that
they will be less involved in pushing subsidized leases.
GMAC has said it would no longer offer incentive-based leases in Canada, but didn't outline specific
plans for the United States.
There are two factors at work here: The rising cost of borrowing for these lending giants and the collapsing
values for a lot of vehicles coming off lease.
It's not uncommon now for lenders to lose money on leased vehicles. That's because these vehicles sell
wholesale for a lot less than the residual
value that was negotiated when the leases were financed three or more years ago.
The drawback on lease values could put automakers in a bind because they have traditionally used low-payment
subsidized leasing as a way to clear inventory.
But for that to work, the leasing company must be able to sell vehicles for near their forecast residual
values when the contracts are up.
A lot of the vehicles now coming off lease are big SUVs and pickups. Although these vehicles were attractive
not so long ago, the resale values have plummeted by as much as 30 percent due to the high price of gasoline.
So what does it mean to consumers?
Your options may now be limited if you've always leased your vehicles because it allows you to drive a more
expensive vehicle than if you did conventional financing.
Aside from seeing fewer deals on fewer cars, leasing companies may require a larger capital cost reduction
-- "lease speak" for a down payment.
Making a larger down payment in a lease is not advantageous to a consumer because that's money you will
never get back.
When you put a down payment on a car you're buying, that's an investment in equity. In a lease, it's just
reducing the risk of the leasing company because it can be used to reduce the end-of-lease residual.
Savvy consumers with good credit now may want to shop some private leasing companies if manufacturers are
no longer going to offer big lease subsidies.
Often, a leasing company not associated with a manufacturer can more closely monitor its long-term risk on
leases and still offer an attractive payment.
While it may be hard on some consumers, this shift could turn back the clock to a time when leases were
primarily the finance method of businesses that could write off automotive expenses, while the rest of us had to depend
on conventional financing.
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