10.06.06
Auto Leasing Makes a Comeback
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 past few years. Now, instead of cut-rate financing, cut-rate leases are the attraction.
How auto leasing works, 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, along with taking over a short-term auto lease.
“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.”
Hinnant says that Navy Federal offers leases that start at 24 months and go up to 60 months. Navy Federal can also offer sales tax exemptions in states that apply because they are a government agency.
Mileage standards on leases can also be adjusted, but at a price. The normal 15,000 miles-per-year can be pushed up if you think you will go over the limit. The mileage standards range from 10,000 to 20,000 miles per year depending on the manufacturer’s leasing options. However, it’s a better bet to lease a vehicle with low mileage terms because the higher the miles, the higher the monthly payment.
While mileage options and leasing terms might appeal to the consumer, the main issue remains the monthly payment.
The lease’s allure
“For most consumers, low monthly payments are the incentive that gets them into a lease,” says Hinnant. Especially those who take over an auto lease and receive a cash incentive for the auto lease.
Some credit unions, such as Navy Federal, offer potential customers no penalties for early termination and no sales tax on the lease in states that apply. However, some manufacturers are also offering lease programs that allow a customer to get out of a lease if they want to buy or lease another vehicle.
In 2005, General Motors offered its leasing customers the chance to return a car if they were not satisfied. The “Freedom Program” was offered to consumers in six states allowing them to return one of three models before they had driven 12,000 miles. A lessee would lose only their down payment.
Litwer says, “Consumers don’t want to be used-car salesmen; therefore they consider the economics of leasing a car and the ability to return the car and get a new car at the end of the term.”
Litwer expects the high-end vehicle leasing market will go up 50 percent or more by 2007.
Both automakers and consumers have grown smarter in the leasing game. Auto makers who once flooded the market with lease deals that left them with a deluge of low-mileage, off-lease vehicles in the late 1990s are now better prepared to market off-lease vehicles through their certified used vehicle programs.
“The trend seems to be that captive leasers stick with shorter terms. They try to discourage leases past 36 months because they want to certify the car and it’s much easier to certify a newer car than an older car,” says Shebesta.
Consumers will gravitate toward the best deals whether the deal comes from a captive lessor, a credit union or an independent.
“People know what they want, how much they can afford and how long they want the car,” says Lewig.
Learning the lease language
The No. 1 rule in leasing is for consumers to know exactly what they need in terms of monthly payment, length of lease and mileage. Need to find an auto leasing term? View the list of auto leasing terms to educate yourself before seeking out an auto lease. Automakers and financers want repeat customers and leasing offers them a better chance at bringing them back.
“If you are completely honest with yourself and know beforehand what exactly you want and need,” says Litwer, “leasing will leave you very satisfied.”
Reference: Bankrate.com