Leasing roared back to life last year, fed by an ideal — and unusual — combination of low interest rates and high trade-in values.
Before the 2008 recession, when leasing nearly collapsed, it accounted for about a fourth of new-vehicle sales in the U.S. and was a critical tool for automakers and dealers.
One of leasing’s biggest attractions is that it typically offers lower monthly payments than a sale.
In fact, some analysts think that the growth of leasing could help propel sales in the U.S. past 14 million this year. Automakers sold 12.8 million vehicles last year.
Leasing works this way: Let’s say you are looking at a loaded $30,000 midsize sedan and considering a lease.
If the car is estimated to be worth $18,000 in three years, you would pay $12,000 plus interest on a three-year lease — about $350 a month.
At the end of the three-year lease, the consumer can buy the vehicle or turn it back to the bank or company that financed it.
With fuel prices once again threatening to spike past $4, leasing may be the best way for consumers to buy large vehicles and be covered if their residual values drop. In 2008, for example, the resale value of full-size SUVs plummeted when gas hit $4 a gallon and panicked owners dumped them for smaller vehicles, flooding the market with used SUVs.
Former Ford dealer Jerry Reynolds, host of the Car Pro advice show on the radio, won’t be surprised if leasing accounts for 35 percent of new-vehicle sales “in short order.”
“It’s not for everybody,” Reynolds said. “For a lot of people — even someone who can pay cash — it’s got a lot of options.”
The downside is that consumers can typically put no more than 12,000 to 15,000 miles a year on their vehicles without paying penalties.
Five years ago, automakers — particularly the domestics — got themselves in deep trouble by setting residual values artificially high, enabling low monthly payments.
When high fuel prices ruined SUV resale values, causing lenders to lose millions, leasing quickly fell from favor.
Al Hearn, founder of LeaseGuide.com, agrees.
“Leasing is coming back, but in more sensible ways,” Hearn said. “I think the 25 to 30 percent range is a natural plateau.”
Nonetheless, many in the business expect to see some reduced lease rates this spring and summer. Automakers can subsidize a lease vehicle’s resale value, which results in lower monthly payments.
With leases, automakers can hide their incentives. “You never look like you’re running a fire sale,” said George Hoffer, professor of business at the University of Richmond and a longtime observer of the auto industry. “It’s not as apparent as putting $5,000 cash on the hood of a vehicle.”
Leases also guarantee that dealers will get vehicles back in two or three years — lightly used late-model cars and trucks that they can put directly onto their lots.
“We will see more two- and three-year leases, and that means we’ll see more fresh cars returning off lease,” said Paul Taylor, chief economist of the National Automobile Dealers Association. “That’s good for the industry.”
-Terry Box, Dallas Morning News