How Will the Pull-Back in Leasing Affect Consumers?
Leases Will Be Harder To Find and Payments Will Be Higher
When Chrysler recently shocked the automotive world by announcing it wouldn't be leasing its vehicles anymore, it triggered a chain reaction throughout the industry. Ford and GM also announced restrictions to their auto leasing programs. And banks, such as Chase and Wells Fargo, which had leased vehicles for years, also decided to call it quits.
How does all of this affect the consumer? Will you still be able to lease vehicles? More importantly, will this type of financing still make sense?
The answers to these questions aren't completely clear yet and the fallout is still being felt. However, there are a few points that we would like to clear up and some advice we can offer.
But first, a little background.
Leasing's Appeal...and Its Danger
Consumers love auto leasing because it offers an easy way to get into a new car with a lower down payment and lower monthly payments than financing a vehicle to be purchased. This is because you are only paying for the amount of the car's value that you use. Typically, people lease for three years, so they only pay for the first three years of a car's life — which are definitely the car's best years.
Car dealers also love leasing because it brings customers back into the dealership at the end of the lease, every two or three years. Also, because many consumers are confused by leasing terms, dealers can more easily take advantage of them.
Manufacturers love leasing because it allows more people to get new cars, even as the cost of those cars rises in relation to their earning power.
But to make money on leasing, the manufacturers' leasing arms (as well as private banks that lease) have to think beyond just the lease period. What will the car be worth when it is returned to them? Accurately predicting the amount (called the "residual rate") will affect their profit on the vehicle, as well as the consumer's lease payment.
In the past, the automotive industry has been able to accurately predict the residual values of vehicles. But with rising gas prices and the sagging housing market, the residual value of vehicles (particularly large SUVs and trucks) has fallen sharply. Reports of manufacturers losing $5,000 per vehicle are not uncommon, according to Jesse Toprak, executive director of industry analysis for Edmunds.com. Instead of being worth 40 percent of their original sticker price, trucks and SUVs are, in some cases, worth only 28 percent of the sticker price.
Will Leasing Survive?
"I love new cars," a consumer lamented to Edmunds in response to news of the leasing troubles. "I want a new car every three years, sometimes sooner. I don't know what I'm going to do now."
Leasing is not dead. It is too valuable a tool for manufacturers, dealers — and consumers. But how will it change now that many of the biggest players are pulling back?
To some degree, leasing is a self-adjusting finance method. Now that resale values are falling, lease payments will certainly go up. So the short answer is that the days of screamin' lease deals are over for now. But the advantages of leasing are still there, at least in theory.
One advantage of leasing was that you could "drive more car for the money." A $500 monthly lease payment might put you in a BMW, whereas a $500 loan payment would buy a Honda Accord. In other words, you couldn't afford to buy the BMW — but you could lease it. This led to the criticism that leasing allowed people to drive cars they couldn't afford.
The upshot of the leasing trouble is that we might now have to take a closer look at what we can truly afford. This is similar to what has happened in the housing market. Loans were written that put people in houses they couldn't afford. When resale prices fell, the dream crumbled.
So what is happening in the auto leasing market could be called another "economic correction" or a wake-up call for lenders.
But what about those people who love a new car every three years?
Advice: Searching for a Good Lease
First of all, not many consumers will be affected. Leasing has waxed and waned, but was never more than 20 percent of all vehicle transactions. It was rising to the point where one in five people chose a lease in 2008. So, this restriction will still only limit a small percentage of the car-shopping public.
Many of the manufacturers have revamped their leasing programs. So if you leased in the past, don't assume the same rules apply. Additionally, many lease payments will be so high that consumers will have no choice but to go to a less expensive vehicle — one they can actually afford.
In addition, keep the following advice in mind as you shop for a new lease:
- Credit requirements will be tighter. In some cases, only people with the best credit will qualify for manufacturers' leases.
- The higher payment might still make sense if you can take the tax write-off as a business deduction.
- Buying looks better than ever, especially with dramatic incentives in both cash and financing.
- Carmakers will offer low-interest financing to try to match low lease payments of the past.
- Dealers will urge people to buy rather than lease and extend the loan terms to 60, 72 and even 84 months. (Warning: This results in more "upside-down" buyers and more buyers will carry negative equity from one car loan to another.)
- Check several banks, smaller leasing companies or your credit union for a good lease. (Our financing tab will help you get rates from different companies.)
- If it suits your needs, look to foreign automakers, whose lease programs are stronger.
- Consumers looking to take over someone else's lease can visit Lease Trader or Swapalease.
Advice: Ending Your Current Lease
If your current lease is ending and you are considering buying the vehicle, keep in mind that the residual value listed in the contract - the price for which you can buy the vehicle - may be out of sync with the current market. This could possibly work in your favor.
If you are currently leasing a fuel-efficient car, such as a Toyota Prius or a Honda Fit, the residual value might be so low you could buy the car at a bargain price. However, if you are leasing a gas guzzler, and want to buy it, the price will probably much higher than you could buy one for at a used car lot or from a private party. However, the leasing company might be willing to negotiate that price to sell it to you. Before you negotiate, check Edmunds.com True Market Value prices to make an informed offer.
Edmunds.com will continue to follow this emerging situation and bring you any changes as they occur. In the meantime, we offer an extensive leasing advice section including "10 Steps to Leasing a New Car" and a comparison of leasing, buying and buying used. Additionally, our Basic Lease Calculator helps you estimate what your lease payment will be. You'll see a Lease vs. Buy calculator there, too. The results may appear counterintuitive, but a detailed explanation can be found by clicking the link that appears at the bottom of the page once a vehicle is selected. The lease or buy recommendation is based on a broader financial picture, not merely a comparison of the monthly loan or lease payment.
The general turndown in the economy — and in the automotive industry in particular — has caused drastic changes, such as this pull-back in leasing. While a small percentage of consumers will be affected, informed car shoppers can still find a convenient way to lease or buy the car that's right for them.