Car leasing - End of an era?
Desperate to cut their recent 10-figure quarterly losses, several companies announced this week that they are abandoning or partially withdrawing from the leasing market. Chrysler announced on July 29th that it was bailing out of leasing altogether. The same day, Ford told some dealers it would raise the prices on truck and SUV leases, as reported by the Wall Street Journal. And BMW announced it would tighten terms on its leases, which account for 60 percent of the company’s sales in the U.S., according to Bloomberg.
Lease contracts depend on forecasting the trade-in (aka residual) values of vehicles at the end of the lease term. And high gas prices have accelerated the depreciation on larger models in a way lessors could not have forecasted just a few years ago. Also, some models have had incentives packaged into their financing plan, known as subventing, artificially inflating residual values. As a result, many vehicles coming off lease are worth much less than the residual value resulting in massive losses for finance companies such as GMAC and Ford Motor Credit.
Chrysler notes that its dealers will still be able to offer leasing through other financial institutions. However, on the same day, JPMorgan Chase announced it would also no longer offer leases on any Chrysler models, according to the Detroit Free Press. These changes do not affect current lessees, and Chrysler says it will provide loyalty incentives to those customers who purchase a new Chrysler, Dodge, or Jeep vehicle.
So, what does this mean?
For many customers, leasing has been a means to get lower payments and afford larger, more premium vehicles than they could otherwise. Lease payments cover only the predicted amount of depreciation on a car for the duration of the lease, plus a finance charge.
Consumers will have fewer finance options going forward. While leases will still exist in some form, they may not be as readily available or marketed with the incentives that have been common.
As a result, it will be more difficult for car shoppers to extend their reach to more expensive vehicles. This creates the temptation to take on loan terms of six or seven years to afford payments on a dream car. This shifts the depreciation risk from the automaker to the consumer. Today, 60-month loans are common, stretching longer than many warranties. Pushing loan terms out further increases the likelihood customers will want to trade-in before the loan is paid, and add the debt from one car into the next, essentially leaving them paying off two cars. They also risk that if the car is stolen or destroyed, their insurance payment won’t cover the amount they still owe.
Off-lease cars have also been a valued source for used car shoppers. Off-lease models are typically in excellent condition and are usually run through a detailed inspection process. The best part? A three-year-old vehicle has already taken its greatest depreciation hit. But with fewer leases, the cars that reach used-car lots will likely become older and arguably less desirable.
What to do?
Current lessees can celebrate that they may not be paying the full cost of their vehicle’s depreciation. But, when it comes time to acquire the next model, buyers should take care to understand the true financial implications. Very likely, people will have to keep their cars longer either to pay off a longer-term loan or to accumulate a larger down payment than they might have needed in the past. And they may have to look for a car that merely meets their needs, rather than one that satisfies their wants.
As before, it pays to select your next ride based on Consumer Reports testing, reliability, safety, fuel economy, and other key factors that can be readily researched at ConsumerReports.org. (And quickly, too, using the New Car Selector.) But we also encourage shoppers to carefully consider the owner cost data, available on the model pages, which reveal the complete economic forecast, including depreciation, fuel costs, loan interest, insurance, and other factors. Then, take the time to read through either our new- or used-car buying advice. Admittedly, this is a bit of homework, but with the changing economic environment and automotive market, the car-buying test has gotten harder.
Learn about the "Pros and cons of leasing."
—Jeff Bartlett and Eric Evarts
