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Archive for Thursday, August 7, 2008

Economy may prove death knell for auto leasing

August 7, 2008

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Is auto leasing really dead?

Oh, I so hope so.

But, alas, that question was just a headline on a news release from the National Vehicle Leasing Association. The organization, which represents the leasing industry, was responding to news that some auto manufacturers are drastically scaling back their leasing business because it isn't so lucrative anymore.

GMAC Financial Services, the lending arm for General Motors, reported a net loss in its auto finance business of $717 million in the second quarter of 2008 in part because of weaker performance in its leasing operation. The company said a sharp decline in lease demand and in used vehicle sale prices for sport-utility vehicles and trucks in the U.S. and Canada were to blame.

"As a result of these market trends, GMAC is taking steps to reduce the volume of new lease originations in the U.S.," the company said.

GMAC also said it was discontinuing lease incentive programs in Canada.

Meanwhile, Chrysler announced it was going to "repackage" its auto incentives to make it more affordable for customers to buy rather than lease.

The automaker said its new strategy includes 72-month finance deals on an expanded range of compact, midsize and full-size vehicles. With the longer loan terms, vehicle buyers would end up with payments similar to 36-month lease payments. The company is even offering up to $750 toward the purchase of some new vehicles for returning lease customers.

"As part of our annual August model-year clearance, we are leveraging the move from leasing to retail purchases to offer our customers the best deals of the year and make buying as affordable as renting," Jim Press, Chrysler vice chairman and president, said in a release announcing the new program.

Hallelujah.

Bad deal

For years I've been trying to get people to see the financial folly in leasing a vehicle. Finally it's taken a convergence of economic events - rising gas and food prices, a slow economy, job losses - to park auto leasing as a lifestyle.

Beginning in the 1990s, the percentage of consumers who leased their vehicles began to significantly rise. People who couldn't afford to buy luxury vehicles found they could rent a better ride by leasing.

Foolishly, consumers bought the marketing hype that leasing made sense if you had to have a new car every few years. They focused on the short-term truths about leasing such as monthly payments lower than monthly car loan payments.

About 19 percent of vehicles driven out of showrooms last year were leased, according to Edmunds.com, an online resource for automotive information. Automobile leasing expanded 21 percent between 2005 and 2006.

Losses

One of the key factors in a lease contract is what's called its "residual value." That is the amount you need to buy the car at the end of the lease.

As gas prices have surged past $4 a gallon, used SUVs and other gas-guzzling vehicles have become increasingly difficult to sell.

Because of the lower projected values, leases on such vehicles will become more expensive, according to Automotive Lease Guide, which provides residual value forecasts.

Many auto finance companies are taking huge losses because they "did a bad job of projecting that the residual values were going to be down," said Sergio Stiberman, founder and chief executive of LeaseTrader.com, an online marketplace that matches people wanting out of a vehicle lease with individuals looking for a short-term lease.

Additionally, people who are coming to the end of their leases for SUVs and other vehicles with poor fuel economy aren't opting to buy them because of high gas prices, contributing to the lease losses, Stiberman said.

So the curtailing of leasing may come not from people exercising common sense but market forces.

Don't do it

Now if you still think leasing can work, let me try to dissuade you. Here's why leasing is an unwise choice:

¢ In June, the BMW 3 Series was the most preferred leased vehicle, according to LeaseTrader.com. I'll admit that you can get a luxury car for less money on a month-to-month basis. But this only means you are living beyond your means.

¢ Lease contracts typically impose additional charges for excess wear and tear. I'm guessing the folks who irritatingly take up two parking spaces to avoid dings are probably leasing.

¢ You may drive more than you anticipated. If you exceed your mileage allotment, you will pay dearly, typically 15 cents to 25 cents for every mile over your limit.

Long term, paying off a car and keeping it for years are inherently better ideas for you financially. If you want to be rich instead of riding around looking like you're rich, don't lease.

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