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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 last 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 are scaling 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 rising-interest-rate
market. 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 J.D. Power and Associates, the
car-leasing market sat 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, financial services, for J.D. Power and Associates.
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.
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. 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 lessor may not be able to provide
other incentives like 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.
It's not a cookie-cutter market anymore."
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