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| The Basics | Auto leasing is back -- and better
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Lease deals look more attractive as interest rates rise and those big rebates disappear. And with dealers desperate to move cars, consumers hold a lot of power.
By Bankrate.com
Remember auto leasing? It was huge in the late 90s, but faded after 2001, when interest rates plunged through the floor and some car dealers started offering 0% interest. This summer, leasing is back. And this time, theres a twist.
Auto leasing now aims to please everyone. With consumer interest rates inching up, drivers can get what they most want: low payments. Manufacturers are eager to relive 1999, when leasing comprised nearly 40% of their deals.
With the prospect of more new cars rolling off assembly lines than there are likely buyers, auto makers hope leasing can put drivers into those vehicles until the leases end and the vehicles are sold as certified pre-owned cars.
Leasing also brings traffic through showrooms, helps generate brand loyalty and gives dealers a way to ease out of back-breaking rebates and cheap interest-rate loans that buyers have come to expect. To those ends, dealers are luring consumers with lease improvements like easier-to-break contracts and sign-up incentives.
"Nothing gets people off of looking at the size of the discount more than giving them a very low monthly payment," says Art Spinella, president of CNW Marketing Research.
The deals
Some examples:- General Motors tried a pilot program, called the Freedom Lease, in California and five cities, in which eligible consumers itching to drive a Buick LaCrosse, Chevy Cobalt or Pontiac G6 could break their leases for any reason within the first 12,000 miles, forfeiting the $1,500 down payment.
- GMAC SmartLease customers, on the other hand, could skip their remaining payments, as long as they lease or buy another GM vehicle.
- Not to be outdone, Toyota tapped a select group of 40,000 customers and offered to waive the last six months or less on their lease payments and forgo a security deposit if they lease or buy a new vehicle.
- Mercedes-Benz doesn't mess around: the Loyalty Accelerator program allows customers who opt out of a lease early to either apply a credit, equal to three payments, toward their current contract or slap it on a new lease for a C240, C320 or CLK 320C Coupe.
Overall, leasing levels crept up to 15.8% in May 2005, reports Mike Chung, pricing and market analyst for Edmunds.com.
Why lease?
Leasing once again provides the consumer advantages that enticed Americans in its heyday -- lower payments and a way to sidestep the depreciation issue at resale, says Jonas Samuelson, executive director for GM North America sales, service and marketing.
Related news and commentary on MSN Money
But mostly, it's the lower monthly payments. After all, some lucky drivers are tooling around town in minivans for $140 a month.
Among car shoppers at Autobytel.com who are considering a lease, 75% say it's because leasing allows them to upgrade to a better vehicle. The 25% minority go this avenue because it's the only way they can afford something decent. (Although in total, folks here still lean 62% to 38% toward car ownership.)
Mark Perleberg, the lead auto expert at NADA Guides, used this route to put his future stepdaughter into a brand-new Honda Civic for the $7,000 her family budgeted. "Now that short-term interest rates have shot to close to 6% on a purchase agreement, the differential between what it costs to own that vehicle and to lease it has spread," he says.
Leasing is nice for manufacturers
Automobile manufacturers face tough numbers in 2005: Of the 180 million licensed drivers in the United States, only 2.7% of those are in the market for a vehicle each day, according to Perleberg. What's more, the brass are pushing for 7% to 8% increase in production this year, which means dealers will have 19 million cars for 15 million buyers.
So at the very least, leasing's lower payments equal higher foot traffic through the dealerships, says John Honiotes, vice president of Autobytel.com.
And with the advent of certified pre-owned used cars, manufacturers want their vehicles back under their roofs in three years, when these cars reach prime resale value. Car manufacturers will do all they can to ensure a stable pool of eligible cars in 2008 when today's leases come to an end.
Don't underestimate leasing's ability to create a captive audience, as well. At the very least, dealers get first crack at keeping their previous customers who want to break or renew a lease, says Honiotes.
Perhaps more importantly, this angle helps to solve the incentive mess that manufacturers dug for themselves with 0% financing and ever-spiraling rebate deals. They started in the 1980s with Lee Iacocca's "buy a car, get a check" $50 rebate campaign. By mid-2005, the statistics were up to $5,100 per vehicle in giveaways.
For some models, leasing deals become the proverbial coupon of the car industry -- a tried-and-true way to get stock off the lot before the newer, more attractive body styles roll in.
How to shop for a lease
Consumers wield the power. To date, drivers have used their influence to get shorter leasing contracts (think 24- to 36-month leases) that feature more customized options in areas such as mileage, says Chung. And thanks to the Federal Reserve's insistence, those legal documents are far easier to read and understand in 2005 than they were in 1995.
But the tired adage about doing your homework continues to apply. Leasing contracts still insist on low mileage -- the better for manufacturers to keep that residual high for resale -- so if you can't predict your annual miles "you shouldn't be looking at leasing regardless of the program out there," Honiotes says.
Before you commit in writing, realize that there's still interest baked into the lease payments. Ask the dealer to provide the interest rate at which he is calculating the lease. You also need to be comfortable with the leased vehicle's capitalized cost, which, for all practical purposes, is the selling price on which he bases the monthly payments. It's guaranteed to be different than the car's sticker purchase price.
"We're seeing a lot more leases with higher cap costs," says Chung. "It's definitely a way to lure the consumer into a false sense of security by saying, 'You can get this Mercedes, for example, for $299 a month.' But if you need to put down $5,000 to reduce the cap cost to reach that payment, it's really not that great of a promotion. The consumer really needs to do her due diligence."
Honiotes recommends pushing to see if the dealer will apply the model's rebate dollars to that cap cost. "Car dealers these days respect an educated buyer. They treat them with more respect and better deals."
By Julie Sturgeon, Bankrate.com
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