Exhaust Note #23: Dude, Where's My Lease?
- August 4, 2008
- Car Buying, Exhaust Note, The Car Biz
- Posted by Ed Kim
- Comments Off on Exhaust Note #23: Dude, Where's My Lease?
No doubt many of you have heard the news about the Domestic manufacturers pulling back from leasing. Chrysler has pulled out of leasing altogether effective August 1 while Ford and GM are significantly raising their lease rates on many vehicles, particularly trucks whose residuals are now in the tank.
What’s the rationale here, and what does it mean for the consumer? Well, let’s start off real quick with a one-paragraph explanation of leasing for the benefit of those of you who are still a bit confused as to what leasing is (it’s ok to admit it – there are more than a few of us!). In a nutshell, when you lease a vehicle, you’re essentially paying monthly payments that add up to the difference between what the vehicle is worth new and what the car is pre-determined to be worth (residuals or resale value) when the lease term is up. This means that among similarly priced vehicles, those with higher resale values will generally have a lower lease price since the difference between the sales price and the pre-determined residual value at the end of the term will be smaller.
So what does this ultimately mean for the consumer? According to AutoPacific’s 2008 Research Suite, about 12% of Chrysler LLC’s customers, 15% of GM’s customers, and 23% of Ford’s customers lease. Those numbers aren’t insignificant. So instead of leasing, the Big Three are encouraging potential lease customers to finance; Chrysler is currently offering 0% financing over 72 months on many models to bring payments down. However, this now puts the burden of dealing with the car’s residuals on the consumer.
For those consumers that strongly prefer leasing (for example, business owners or those who simply like getting a new vehicle every couple of years), what to do? We don’t believe that the Big Three pulling away from leasing will result in a significant and further downturn of total industry sales. What we can see happening, however, is further accelerated migration towards the imports. The top tier imports, you see, tend to have lower lease rates because of their higher resale values. Unless one is absolutely devoted to buying (or in this case, leasing) American (and there are fewer and fewer every year), leasing an import brand vehicle will simply make more sense to the lessee than having to deal with poor residuals and/or the hassle of having to try selling the vehicle – or get raked over the coals trading it in at the dealer – when it’s time to get a new vehicle.
The whole thing is a double-edged sword. Pulling away from leasing will lead to at least some reduced volume and increased import market share, but it will also put an end to a source of financial bleeding. However, given the Big Three’s current state of affairs, it makes more sense to address its major financial health problems that continue to chase after market share…which is a losing battle no matter what. After all, the import brands are here to stay because the market has long since decided to embrace their presence in the marketplace.