Leasing returns, but bargain rates harder to find
Alisa Priddle / The Detroit News
Vehicle leasing is resurging at a slow and measured pace, but wary automakers say it is unlikely to ever return to the madcap days when irresistibly low monthly rates drove up demand.
Consumers are still attracted to leasing because it is generally cheaper than buying, and they can always drive a new car. Dealers like it because it keeps customers coming back every few years and ensures a good selection of quality used vehicles. But automakers and lenders are being cautious after the worst recession in decades helped dry up car and truck sales, fueling big financial losses when returned lease vehicles were worth far less than expected.
“We spoiled people,” said George Fowler, general manager of Superior Pontiac Buick GMC Trucks in Dearborn. “Everyone who walks in wants to lease a car because they were taught in the past that payments are cheaper. People walk in and ask for a $200-a-month lease.”
Then they learn a standard lease on a $29,000 Buick Lucerne is $800. “No one will take that,” he said.
Today, lower interest rates to buy a car combined with higher lease rates than in the past mean leasing may no longer be the best deal. But it is available again after nearly grounding to a halt a year ago, and dealers and industry watchers expect leasing to expand to more vehicles at attractive rates.
“The financial markets are slowly recovering and there is a willingness of banks to lease now,” said Paul Taylor, chief economist for the National Automobile Dealers Association. “They have decided this is one area of lending that it is safe to re-enter.”
Leasing was rampant early in the decade but that changed when gas prices spiked. Truck sales plummeted and financial institutions were caught by rapidly dropping residual values, or resale values, that are used to set lease financing rates, said Marc Sheinbaum, chief executive of Chase Auto Finance in Garden City, N.Y. That resulted in losses for lenders and automakers when vehicles were turned in to be remarketed or sold at auction.
At the same time, the financial market meltdown and credit crunch were wreaking havoc on vehicle sales, especially in Michigan, further hurting automakers and their lenders.
GM and Chrysler stopped leasing in the fall of 2008 when GMAC Financial Services and Chrysler Financial, shut down financing. Chase immediately dropped its Chrysler leasing as well, Sheinbaum said. Most institutions pulled back their financing of leases to reduce exposure to risk, he said.
Suddenly there was one less option for consumers already reluctant to get a new car. And those who tried to buy often found they did not qualify for financing. Leasing as a percentage of sales fell to 17 percent at the end of 2008 from 21 percent in 2007, according to CNW Marketing Research in Bend, Ore. And while there are not full industry figures for 2009, Chrysler and GM leasing had been pacing at about 2 percent when there was only sparse regional financing.
Volumes expected to rise
In August, U.S. Bank started offering leasing again for Chrysler and GM, and GMAC got back in the incentivized lease game shortly after that.
“We expect leasing volumes to increase somewhat next year, but not to the levels seen prior to 2008,” said GMAC spokeswoman Sue Mallino.
GMAC received government aid to encourage the bank to increase lending to GM and Chrysler, including for retail leasing.
Last month, about 2 percent of GM vehicle sales were leases, far below the industry average of 13.2 percent, said Susan Docherty, vice president vehicle sales, service and marketing.
Chrysler leasing now accounts for 5 percent, said spokeswoman Kathy Graham, and should hit 10 percent next summer when an all-new Jeep Grand Cherokee launches, a vehicle that traditionally has a high lease rate.
Both automakers expect leasing to settle at around 10 percent of their sales and say they will be strategic in which vehicles are eligible for the best deals, such as new products.
“In the past, we used leasing as a tool for buying (market) share and pushing cars out into the market,” GM’s Docherty said. “With our new portfolio, we need to earn market share, not buy it.” She said GM lease deals will focus on luxury vehicles, particularly Cadillac, midsize and compact crossovers, midsize cars.
The popularity of leasing varies by brand, but has always been strong among luxury marques. “It allows you to drive a vehicle you probably couldn’t afford to buy,” said James Bell, executive market analyst with Kelley Blue Book in Irvine, Calif.
Ford Motor Co. cut back but did not stop leasing, said spokesman Robert Parker. It focused leasing dollars on its retail business and luxury models.
When Ford’s residual values started shooting up in October, the automaker boosted lease incentives on key vehicles in some markets as part of a regional incentive strategy. Customers in Detroit, for example, can get up to $1,500 in cash for leasing a Ford Edge but that deal is not available nationwide.
“There are some areas of the country where it is more important than others,” Parker said.
Growth will take time
GM dealer Fowler said his leasing was cut off 18 months ago and resumed in September, but only on select models with the promise that leasing will expand to more vehicles with favorable rates and the rates will become increasingly reasonable.
Baby steps is how he describes the renewed interest in leasing, which accounted for less than 10 percent of his business last month compared with almost 80 percent two years ago. He thinks it will eventually get to about 20 percent. “I got burned badly last time when the economy took a dive and gas prices went up. Wholesale values of cars at auction took a dive and there was a glut of used cars.”
The opposite is true today. The credit crunch, tight market, recession and cutbacks in leasing have depleted used car stocks. NADA’s Taylor estimates there are about 8 million used cars that never came on the market over the last two years.
He said the changes to the leasing market also helped raise residual values every month this year, even with companies erring on the conservative side.
Bell said 2010 models are projected to retain about 33 percent of their value five years from now, on average.
But educating consumers will take time.
Cedric Viquerat of Hartland said he knew leasing had become more expensive, but when he looked into a new GMC Yukon on Tuesday, he was surprised to find little difference between the cost to buy or to lease and is still figuring out which way to go.
As the economy and consumer confidence continue to improve and financial institutions are more willing to write leases again, leasing should increase, Bell said. And while he sees the return of leasing as a positive sign, “I don’t think it will power the industry back to 12 million sales.”
apriddle@detnews.com (313) 222 — 2504 Bryce Hoffman and Robert Snell contributed.
