Leasing companies bumping monthly payments
If your lease expires soon and you were counting on leasing another car or truck, you may be in for a shock, starting with a higher monthly payment.
You may not be able to get a lease at all, because several auto lenders have cut back on offering them. Chrysler Financial quit offering leases cold turkey last summer. GMAC Financial Services also has cut back, as did Ford Credit, although Ford has stuck with leasing to a greater extent than the other two.
All of the auto finance companies ran into financial problems in 2008 after demand fell for new cars and trucks. At the same time, used-car values fell, especially for full-size SUVs and pickups.
When cars and trucks come back to the dealership after leases expire, the auto lenders end up selling most of them at wholesale auctions. If the used vehicles are worth a lot less than the company expected, the auto lender and its parent company have to cover the loss.
It may be locking the barn door after the horse got out, but auto lenders have now hiked prices on leases to cover the risk of residual values falling like they did in 2008. The residual value is the future resale value of your used car or truck.
For those brands that still offer leases, average monthly payments on a three-year lease have gone up about $50 in the last year, according to the Power Information Network, a subsidiary of J.D. Power and Associates. It gets its data from U.S. car dealerships.
From Jan. 1 to March 8 of this year, the average U.S. monthly lease payment was $498, versus $449 in the first quarter of 2008, Power Information says. In the same period, the average monthly lease payment for large sport utility vehicles went up almost $200 — to $892.
Meanwhile, leasing accounted for only about 15 percent of the U.S. auto industry sales so far this year, down from 22 percent in the first quarter of 2008, Power Information says.
All things being equal, it could still be cheaper to lease than to buy. In leasing, the customer only borrows the difference between the upfront cost and the residual value. For a customer who likes having a new vehicle, who doesn’t mind having a monthly car payment and who doesn’t drive a lot of miles, leasing could still be the way to go. Most luxury brands are still offering leases as a way to make their cars and trucks more affordable.
On the other hand, auto lenders are not putting big discounts behind leases like they were two years ago. Cash rebates and low-interest loans could now make purchasing a better option, especially if you intend to keep your new vehicle for a long time.
There will be plenty of people in the same situation when it comes to deciding whether to take on a new lease at a higher cost. Gary Dilts, J.D. Power senior vice president, says about 1.4 million leases will expire this year. Many of those buyers will switch to loans for new or used cars, he said.
“Right now, it looks like they’re coming out of leases,” Dilts says.