Auto leasing making a comeback
Auto leasing is showing signs of making a comeback after bottoming out over the last 18 months.
Earlier this decade — when U.S. auto sales regularly topped 16 million units a year — leasing accounted for as much as 30 percent of the market in some months. As recently as the first quarter of 2008 — before the worst of the latest recession hit — auto leasing represented 22 percent of the market, according to the Power Information Network, or PIN.
Today, U.S. auto sales are barely topping 10 million units a year — the lowest per capita since World War II — and PIN data show auto leasing fell to a low of about 10 percent of U.S. retail auto sales in the third quarter of 2009.
But the latest data show car leasing rebounded to about 16 percent in the fourth quarter of 2009.
In a lease, the customer, in effect, borrows the difference between the price of the car and the finance company’s estimate of how much the car will be worth at the end of the lease — the residual value.
At lease end, the customer can buy the car but the vast majority turns them back in to the auto finance company, which then auctions them off to auto dealers. If the car is worth less than the finance company thought it would be, the lender loses money.
When U.S. gas prices spiked at more than $4 per gallon in the summer of 2008, demand for new cars and trucks fell, credit dried up and used car values fell — especially for gas-guzzling trucks. Companies financing leases lost billions of dollars. Chrysler Financial quit leasing entirely and for a time, GMAC all but abandoned leasing, too.
Leasing still an option
Leasing is an especially important selling tool for luxury import brands like Mercedes-Benz and BMW and, to an extent, for domestic brands Cadillac and Lincoln. Leasing lowers your monthly payment.
Leasing higher-end models is still easy and while it’s unlikely to regain the popularity it enjoyed before 2008, leasing more moderate-priced models appears to have bottomed and is on a mild upswing.
Jack Ferry, a spokesman for Mercedes-Benz Financial, says his company stuck with leasing, and Margaret Mellott, a Ford Credit spokeswoman, says, “Ford Credit has continued to make leasing available throughout the recession, unlike some other finance providers.”
Tom Henderson, a GM spokesman, says GM expects to rebuild leasing to about 10 percent of U.S. sales. Leasing is expected to be higher for some models and for the Cadillac brand, he says. Before 2008 leasing typically accounted for 20 percent to 25 percent of GM’s U.S. sales.
Here are quick profiles of the Big Three domestic automakers’ recent history with regard to auto leases.
Chrysler Brands: Chrysler, Dodge, Jeep, Ram Truck
Leases available: Yes, but most financial incentives are aimed at purchase loans, not leases.
Chrysler Corp., which includes the Chrysler, Dodge and Jeep brands of cars and trucks, is putting most discounts exclusively on loans, in the form of cash back or low interest rates. Perhaps surprisingly, most lease and purchase financing comes through GMAC, usually associated with General Motors. Chrysler switched its financing to former rival GMAC in April 2009 and now offers discounts only through GMAC. Chrysler’s former finance company, Chrysler Financial — which is independently owned — is still in business, but it’s shrinking as more and more new customers sign up with GMAC. Chrysler Financial quit auto leasing effective August 2008.
Ford Brands: Ford, Lincoln, Mercury
Leases available: Yes, especially on Lincolns. However, most discounts come in the form of rebates and low-interest loans, not leases.
Ford and its wholly owned finance company, Ford Credit, consistently offered leasing through 2008 and 2009, unlike its main domestic competitors, Chrysler and GM. However, even as leasing recovers in 2010, Ford Credit continues to steer customers primarily toward loans. Through the first nine months of 2009, Ford Credit’s share of leases originated by Ford and Lincoln-Mercury dealers in the United States was only 30 percent, down from 40 percent a year earlier, showing Ford Credit is not aggressively pursuing leases. If you want a lease on a Ford product, you can get one but you are more likely to end up getting the best lease deal through some other lender, probably a bank or credit union.
General Motors Brands: Buick, Cadillac, Chevrolet, GMC
Leases available: Yes, especially on Cadillacs, and at times on other brands. Like the others, most discounts apply to loans, not leases.
GMAC virtually quit leasing in late 2008, but resumed in the summer of 2009. Nevertheless, says Henderson, GM wants to limit its share of leases to no more than 10 percent of its total sales on average. The company will do that by steering most incentive money to purchase loans. Cadillac is an exception, since leasing is more popular for higher-priced luxury brands. Wealthier customers are more likely to want to change cars more often, instead of buying a car and keeping it after paying it off. Luxury-brand customers are also more likely to be comfortable with the fact that by leasing they will always have a car payment.