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Leasing Regains its Appeal

With increased availability, over one in four American car buyers opt to lease.

by on Jun.28, 2013

Chevy has turned to super-low lease rates to help spur lagging Volt sales.

Looking for a quick way to cut the cost of buying a new car? You’re not alone, and that’s why a growing number of American motorists are opting to lease, rather than buy.

If that sounds a note of déjà vu, no surprise.  Leasing was big news for U.S. auto buyers in the years leading up to the economic crash.  For luxury brands, in particular, leasing accounted for as much as 80% of their sales. Then the bottom fell out and some makers, notably General Motors, pulled out of leasing entirely.

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As credit has loosened, auto buyers and automakers alike have rediscovered leasing’s advantages and the numbers are once again climbing – but so is the number of lease customers who find themselves wanting to get out of their vehicles sooner than expected, industry observers note.

“Lenders have seen overall stability come back to the market since the recession, and leasing has gradually returned as a larger part of many lender strategies,” says Melinda Zabritski, senior director at Experian Automotive Credit.

According to Experian, leases accounted for a record 27.5% of all new vehicles financed during the first quarter of 2013, up from just 24.4% during the same period a year earlier.

That may explain why, even though industry data show that the MSRP of the typical vehicle went up several percent during that same period, the amount the average buyer paid each month actually dropped ever so slightly, from $462 to $459 during the first quarter of this year.

Leases appeal to both buyers and sellers, and for a number of reasons.  From a consumer standpoint, the most important aspect is that a lease essentially covers only the portion of a vehicle expected to be “used” during the contract period, whether 24, 36 or 48 months.  That means not only a lower payment but it also insulates customers against unexpected drops in the value of a vehicle, such as what happened to big SUVs and pickups when gasoline prices surged to record levels in 2008.

Manufacturers can plan better when they know how long it will be until a customer returns to the market.  And, because leasing has traditionally led to increased loyalty rates, that’s another advantage.  Meanwhile, by lowering the monthly cost of ownership, makers can get shoppers to move up-market.

That’s especially valuable for luxury car brands and explains why they have traditionally had much higher lease penetration than mainstream brands. According to Experian, about 60% of BMW vehicles were leased during the first quarter.  For Mercedes-Benz, the figure was closer to 88%.

That’s not to say less up-market brands don’t see an advantage to pushing leases. Quite the contrary. “We placed a huge bet on leasing” during the economic downturn, George Borst, president and CEO of Toyota Financial Services Group, told Success magazine during a recent interview.

The move helped the Japanese maker get a leg up on competitors who found it more difficult to line-up credit for customers –many facing their own financial problems during the depths of the recession. GM, for example, had to essentially abandon leasing around the time it went bankrupt in mid-2009 and only slowly got back into the lease business in the latter part of 2010.

As 2012 drew to a close, Toyota’s in-house financial services unit surged to number one in overall leasing volume in the U.S. market, up from second the year before, noted Experian. From the maker’s automotive sales side, the ready availability of leasing translated into increased market share.

With more than a quarter of all new vehicles now leased, some analysts have been worried that manufacturers and lenders might be going back to the questionable practices that got so many of them in trouble leading into the recession. And, indeed, there are some examples of note where makers are again heavily subsidizing leases – such as the recent $199-a-month package for the Chevrolet Volt plug-in hybrid.

Despite a few extreme examples – most of them intended to boost sales of slow-selling battery-based products – “I don’t believe we’re seeing manufacturers go back to unsustainable practices,” says Scot Hall, executive vice president of Swapalease.com. “Right now, we’re seeing leases that are based on legitimate market values and reasonable interest rates.”

Studies have generally found lease customers to be happier with their vehicles than those who buy, not only because of lower monthly payments but because lease contracts tend to be shorter and don’t require the haggling involved in trading in a car.

But there are still some lease customers who decide they just have to get out of their vehicle, notes Hall. That may because of changes in personal finances – whether a lost job or a promotion – or a change in lifestyle. Someone with a sports car, he suggests, might suddenly learn of a new child on the way, triggering the need for a minivan or SUV.

Hall estimates no more than 10% of lease-holders want out each year but that has traditionally been a difficult situation to arrange and might require paying a substantial premium to the bank or manufacturer.

That’s where Swapalease tries to come in. The 13-year-old firm acts like a “dating service” for those who want to get out of a lease and those who hope to get a good deal by taking over someone else’s lease. The web service charge a small fee for its basic listings but can also arrange vehicle inspections and even get a car shipped from one part of the country to another. Meanwhile, about 40% of those people trying to get out of a lease will offer some form of incentive, the average running about $400, according to Hall.

While not everyone is happy with leasing, either on the consumer or manufacturer side, most observers expect to see it continue to gain momentum, especially in an era where most consumers have become comfortable with paying monthly fees for cellphone coverage, cable and so on.

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One Response to “Leasing Regains its Appeal”

  1. heyfred3000 says:

    Lower interest certainly makes buying only the “usage” period more attractive, but you’re still paying for the high-depreciation period. When I started driving I was told it made no sense to finance a depreciating asset of any kind. I financed one new car when I graduated, but have bought near-new used cars for cash since. If you look at the figures, it actually is much cheaper right from the start.