The end of leasing? Not quite
As of today, August 1st, Chrysler Financial is no longer leasing vehicles. General Motors has restricted leasing in Canada and hasn't committed to leasing in the US beyond August. Ford continues to lease, but they've manipulated the numbers to make leasing trucks and SUVs extremely unattractive. And several banks, including Chase and Wells Fargo, have announced plans to curb their leasing programs.
What, exactly, is going on?
Consider the nature of a lease. When you lease a car, you basically rent it. Lease costs are based largely on a vehicle's price and residual value -- the projected value of the vehicle at the end of the lease. High gas prices have caused resale values of large vehicles, particularly SUVs and trucks, to take a tumble. Let's say you leased a Dodge Durango in 2006. The lease payment was based on the vehicle being worth, say, $20,000 at the end of the lease. But now that resale values are plummeting, that Durango might only be worth $12,000 at the end of the lease. Result: The organization from whom you're leasing the vehicle loses a big chunk of money.
The chief advantage to leasing has been that it allows consumers to drive a more expensive (and, for the automakers, more profitable) vehicle for a lower payment. For consumers, the reduction of leasing means that buying a high-end domestic vehicle will get more expensive, unless the automakers can come up with some creative ways to make these cars more affordable. Dealerships could be the ones hardest hit, as many rely on leasing for the majority of their business. And automakers are going to find it harder to push their more profitable vehicles. But fewer leases will also mean fewer used cars on the market in 2 or 3 years, which could nudge resale values upwards.
That said, leasing is far from dead. For Asian and European automakers, it's business as usual. Ford will continue to lease cars. While GM hasn't said they will continue leasing beyond August, they haven't said they won't, either. And as some of the bigger banks are shying away from leasing, smaller banks and credit unions may see this as an opportunity and step in to fill the gap. -- Aaron Gold
UPDATE: Chrysler today announced 72-month finance programs with payments similar to a 36-month lease. Does this solve the problem? Not really, if you ask me -- remember, at the end of a 36 month lease you can walk away from the car. But considering how much cars depreciate in the first two years, buyers who opt for a 72-month loan and want to sell after 2 or 3 years could find themselves upside down, meaning they owe more on the car than it's worth.
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Comments
Leasing, IMO, was one of the biggest scams ever created by the automakers. I understand the logic behind it from the business perspective, but it’s never really been a winning situation for the consumer. It may seem like it to the person who maybe couldn’t have afforded a brand new vehicle otherwise, but essentially “renting” the car for those years did nothing for personal wealth. The vehicle, although titled in the driver’s name, did not really belong to the driver. Leasing really only makes sense for the person who puts on a lot of miles in a very short period of time, like a salesperson, or a company.
I’ve never leased a car, and I never will. They’re too hard to get out of if you’re in a bad vehicle or a bad financial way, and the loss you’d take if you had to get out early could easily be as bad or worse than being upside-down on that car loan.
This could be one of the best decisions the car makers have made in a long time.
Purchasing a car certainly does nothing for personal financial wealth. It’s a rapidly depreciating asset that requires ongoing maintenance to boot.
I will frequently either lease or buy depending on the deal at the time. If I feel the car will be worth the residual or less at lease end, and the rates are OK then it makes sense to lease. Clearly leasing the Durango with a lease residual of 20000 but a real residual of 12000 is a great bargain.
Leasing, in their first incarnations (’open ended’) were difficult to understand with many unknown variables and often did leave the consumer holding the bucket (extremely high payoffs at end of term due to mileage, decreased market values or if they wanted to purchase the vehicle), causing much consternation and negative perception. ‘Closed ended’ leases were much more positively recieved; the residuals and mileage charges were known at the time of leasing the vehicle, and as long as they didn’t exceed the lease term mileage there were no surprises at the end. They also had the added benefit of the choice to purchase the leased vehicle for the previously agreed residual price, even if it was considerably lower than average retail at the time. Of course if it wasn’t, you simply walked away and went and picked out whatever new vehicle caught your eye at the time.
Leasing worked for the person who traded their vehicle every 12-24 months, drove less than 10-12K miles annually, and afforded them the ability to drive a more car for less money that was always under warranty (since they always were going to have a payment). Of course, higher mileage leases were available, but at substantially reduced overall benefit and savings. If you really think about it, the person who trades every three or four years doesn’t technically ‘own’ their car either, since they usually never pay it off by completing the term and payoff, they are simply ‘renting’ it from the lending institution that really ‘owns’ it, but with ‘close ended’ terms and an unknown residual when they decide to trade or sell ‘their’ car.
My first new car I bought at age 21 with a 24 month loan. Two years later (almost ot the day when I paid off the car), my second new car I bought when my first new car was totalled (squished in the middle of an I-57 rush hour pileup south of Chicago) and paid cash with the payout from the insurance and money in the bank. OK, so I was making good money but not outrageous. That was in the early seventies.
But why are we going to five, six and seven year loans? People are buying everything over their heads. Not even considering the extra safety and emissions stuff, people want, well, too many options to list. Our cars were simpler then, more the equivalent of the well-sub 20k cars today in terms of equipment. So they were more affordable. The same applies to houses, eating out, etc etc.
There’s nothing wrong with expecting more or, better, working for it, but we’re having dessert first and then wondering why we can’t pay for dinner.
I know I’m guilty of much of what I’m talking about, and yep, I know I’m sounding like an old f*rt, but then, I’m just being myself.
The only problem with leasing in most cases is that it gives the dealer the opportunity to get the full list price on the car as they fenagle the residual value and rates. On an installment purchase you negotiate the price, hopefully at least 10% below invoice, check the interest rate to see if it’s in line and then you decide on the term. Bring along an amortization schedule book (available at any bookstore) and you can figure out the payment by yourself and see if they try to bamboozle you by adding in extras, which 99% of the time they will attempt to do! No dealer can be trusted, no matter what make and how honest they seem. They are the most ruthless business people you’ll ever meet. I know, as I was in the biz for a long time!!!