As
interest rates rise, slowing
the sales of new cars, more
leasing firms are offering better
deals and more options, attracting
customers.
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."
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