By on July 29, 2008

Won\'t be much use for these guys in a few yearsIt comes as no surprise that GMAC and Chrysler Financial no longer offer leases in North America. Ford Motor Credit now joins the "no lease" club by pricing its leases sky high making them unaffordable. Why now? It's simple; the captive finance arms can't get the funding to support these transactions due to the deteriorating credit of the finance arms and their parent automakers. 

Let's review. A retail lease transaction represents nothing more than a long-term rental contract of a depreciating asset. The consumer never "buys" – takes title – to the asset; it remains the property of the lessor, the finance company. (When you finance a car purchase, you get the title, the lender has a security interest in the vehicle only until the loan is repaid.) The lessee (that's you!) pays for the depreciation used of the vehicle and the interest costs on the funds advanced by the lessor to acquire the vehicle.

At the end of the lease contract period, the lessee returns the vehicle to the lessor (walks away) or can purchase the vehicle at the stated residual value. This is the so-called "closed end" lease – which is the way all consumer automotive leases are written in the USA. 

Leasing makes sense for a certain group of automotive consumers. We won't go into the reasons here; there are plenty of other websites that explain the benefits. But leases also make sense for automakers as well.

First, they put consumers into a revolving door of trading for a new vehicle every few years (typically three to four years). Second, by nature of the math on a lease, monthly payments come in much lower versus traditional financing over the same period. (Heck, even if a car loan is for a longer term that the typical lease term, the lease is usually still cheaper. The break point depends on several factors such as interest rates, residual percentage, and credit quality of the customer.) This allows the consumer to acquire "more" car – which usually has greater profit contribution to the automaker.

Third, subvented leases (a term which means nothing more than "factory dollar support" on a lease contract) hide the incentive spend thus making it look better than a "fire sale" on slow selling units. Luxury brands tend to use subvented leases instead of consumer cash rebates to avoid tarnishing their brands.

Consumers do respond to leases, especially for brands that have high residual values or lots of subvention (hence cheaper leases). You get more car for less money. When you can lease a BMW 328i for less monthly payment than a loaded Chevrolet Malibu on a comparable term loan (assuming zero down on both), which would you choose? (Ok, I hear it now, at the end of the Bimmer lease you own nothing versus having equity in your Chevy – I say, who cares?  After four years, do I want a new car or keep driving my now way out of warranty [except for the drivetrain] beater?)

With The Big 2.8 now out of the leasing business, sales will fall even if they come up with more money to support cheaper loan payments (mostly through rate buy downs). Why? Cause some people just like to lease – and the IRS also helps the self-employed who lease by allowing a complete write off of the lease payment (consult your tax advisor). 

For GMAC in the first quarter of 2008, leasing comprised 21% of all of GM's retail business in North America. Some portion of those consumers won't come back to GM without a lease program.

While the automakers' captives may point to falling residuals as the reason for exiting the lease market, the real reason is the credit deterioration of the automakers and their captives. Leases generally remain on the books of the captives, they can't be sold into secondary markets in the form of asset-backed securities. So the captives have to fund those leases themselves.

To do so, either the captives generate the funds internally (from profits and existing lease run off) or borrow from others. Well the captives aren't profitable for a host of reasons and leases are definitely unprofitable due to the meltdown of residuals. GMAC's fixed charge coverage in Q1/08 stood at only 0.82 – it didn't generate enough profits to cover its own borrowing costs!

Second, there aren't lenders to the captives who want to see long lived assets of questionable value on their borrowers' balance sheets, especially given the fact that the automakers themselves live on shaky ground.

The captive finance arms of the Big 2.8 cannot support leasing any longer. Sales will be lost as lease customers seek alternatives. No matter what alternative financing scheme Detroit comes up with, it still won't be a lease. So the import competitors now have a choice – raise their own lease rates due to falling supply of available lease product or capture more market share. Hmmm. 

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57 Comments on “The Truth About Leasing...”


  • avatar
    Runfromcheney

    I don’t know if you can write off Ford just yet. They are only raising lease prices on their trucks, not their cars, while Chrysler and GM aren’t leasing ANYTHING anymore. You can still lease a car at a normal rate from Ford, and I think that counts for some sort of a dead cat bounce from GM and Chrysler.

    But then again, maybe I am just being blindly optimistic because I am a Ford fan.

  • avatar
    toxicroach

    My bet is on expanding market share. It lets them damage the domestics by not doing anything and so lessens the risk of a political backlash.

  • avatar
    John Horner

    Ford is making a huge push to transform itself in a car company once again in North America, and it continues to have leasing as one of the arrows in the quiver in the car and crossover markets, which is where the action is anyway. They are being much smarter about this than GM and Chrysler.

  • avatar
    gamper

    I dont think I would write off lease business for GM and Ford just yet. Though it may be a risky proposition for the time being with rapidly fluctuating (downward) residuals on larger vehciles, I see it very much like the fleet sales Detroit has been trying to wean themselves off of for years now. In theory it may be something they need to do, in practice, it will be difficult to give up, especially when the metal needs to be moved.

  • avatar

    Thanks for the additional insight into what is going on, Ken.

    BMW and its competitors are also taking a bath on leases now. But because they’re in a different position otherwise, we can expect them to continue to offer leasing?

  • avatar
    sean362880

    Great editorial. The fact is though that the residual is often quite a bit less than a 4-year old car is actually worth to a third party, so the consumer does in fact ‘own’ something at the end of a lease. He/she can buy their car at the residual and sell it on the open market, collect the difference and put it toward the next purchase. The finance company always wants to collect more than the actual depreciation on the car, and that’s reflected in the low residuals for cars with high resale value.

    The arithmatic obviously doesn’t work for every make & model, but for some it’s a handy way to stay in a new car for less.

  • avatar
    seoultrain

    While the automakers’ captives may point to falling residuals as the reason for exiting the lease market, the real reason is the credit deterioration of the automakers and their captives.

    Runfromcheney is totally right. Ken’s statement above only applies to GM and Chrysler. There’s a big difference between GM/Chrysler’s decision and Ford’s. And I’m not a Ford fan.

    GM ending leases on the CTS is downright stupid. The BMW 3-series, a serious competitor, is one of the most-often leased vehicles in America.

    Ford not wanting to take a risk on guessing what residuals of their trucks will be is smart. No one knows for sure where gas prices will go. Plus, anyone who needs a truck is buying them now. The truck market will continue to falter. But you can still lease a Focus/Fusion/Taurus/MKS.

    Those who want to lease an American car only have 1 company to choose from. Not a complete dead-cat bounce, but it’s the same idea.

  • avatar

    sean,

    That’s the way it’s supposed to be, but not the way it’s been lately. Hence the billions in losses on overly high residuals.

  • avatar
    sean362880

    Michael Karesh –

    That’s the way it’s supposed to be, but not the way it’s been lately. Hence the billions in losses on overly high residuals.

    Very true, and I bet GMAC/Ford Credit / Chrysler Financial took a bigger hit than most. Why would you keep your leased Dodge Ram if you can buy a new one at 50% off?

  • avatar
    AGR

    That they stop leasing tomorrow they still have to deal with lease returns at high residual for the next 2-3 years.

    They can easily do open end “heads up” (current rate) leases with realistic residuals which is similar to a balloon finance.

    Chrysler/GM/Ford are getting out of the “lease on steroids” business (subvented rate / unrealistic residual). Which had become similar to being in the free vehicle business…or darn close.

    The other manufacturers tempted by higher profits and realising what happens with aggressive residuals will reign in their subventions and become more conservative with their residual values.

    Manufacturers need to make a ton of money, and a ton of volume to support “aggressive leasing” neither is present.

    The dilemma is that what started as temporary programs (aggressive leases) to move inventory has become a standard feature of the industry.

    What happened to the “crystal balls” of the consulting companies that are experts in predicting residual values, and nominating winners and losers in the residual value competition among manufacturers.

    Residual values have become a competitive element for many manufacturers. High residuals generate increased sales (volume) which in turn dilute residuals…there is a fine line.

    Leasing is an excellent financial tool for the automotive industry, it can be beneficial and it can be destructive…unfortunately we are seeing the destructive side of leasing when its pushed to the limit of bordering in “free vehicle” territory.

    The customer/lessee is the HUGE winner with this crop of aggressive leases, especially in the US…the individual with a leased full size SUV is laughing compared to the individual with a comparable financed SUV.

    When manufacturers release their lease returns turned into CPO vehicles at subvented rates and aggressive residuals it gets interesting.

  • avatar
    threeer

    Thank goodness for putting the brakes on the “fleecing” of America. All this is/was is a means for people to further get themselves into debt with the illusion of getting more for less. In the end, the driver owns nothing but lost payments. Save your money for three years while you drive a beater and then walk into a dealership with that money as a HUGE down payment on a car you will own in the end. Maybe this will force some common sense back into our purchasing habits, but I doubt it. Most likely, all this will drive is longer loan terms…more debt and staying “over under” longer than ever before.

  • avatar
    Stephan Wilkinson

    “After four years, do I want a new car or do I want to keep driving my four-year-old beater?” the editorial asks.

    Well, that’s the kind of thinking that has gotten us into the overextended, undercapitalized, debt-ridden state we’re in. Must we all be so antsy that we hafta-hafta-hafta have a new car every 48 months? Our daughter’s driving what was our 2000 Audi A4 Avant and the other day a friend mistook it for a “new” Audi. People think my 25-year-old 911SC is “new.” My wife intends to keep her 2004 Boxster until it’s a classic. And our 2006 Volvo V50 is just a baby at this point in its life.

    Repairs on all the cars–including the SC–have been minimal. All you need to do is take care of ‘em and _not_ let them turn into beaters.

  • avatar

    seoultrain : GM ending leases on the CTS is downright stupid. The BMW 3-series, a serious competitor, is one of the most-often leased vehicles in America.

    You beat me to it. I can’t believe how many of my friends/coworkers want a 3-series because of the combo of:

    1) Good lease numbers
    2) Bumper-to-bumper warranty with free service loaner for the duration of the lease
    3) Free maintenance for the duration of the lease

    IIRC, Cadillac used to offer #1 and 2 for the CTS and that was pretty good. Without the lease, there’s much less incentive to get off of this country’s 3-series addiction.

    GM didn’t close the door on Cadillac with this move, but it sure has hell didn’t help matters.

  • avatar
    sean362880

    threer-

    All this is/was is a means for people to further get themselves into debt with the illusion of getting more for less. In the end, the driver owns nothing but lost payments. Save your money for three years while you drive a beater and then walk into a dealership with that money as a HUGE down payment on a car you will own in the end.

    Look, a new car is a lousy investment no matter how you slice it. Nobody should be buying/leasing/looking at a new car if they’re not financially stable to start. But leasing isn’t as bad as you make it sounds, especially compared to paying cash.

    Say you follow your plan, and save up $20 grand of your auto budget by beater-driving for 4 years. You’ve got 2 options: you can either blow it on a downpayment on a quickly depreciating asset, or you can invest the money at 10% and lease the car at 6%. You lose money both ways, but you’ll lose it less quickly with the lease.

  • avatar
    Steve_S

    Of course a 25 year old 911 has only marginally different sheetmetal than a 2009, I kid I kid, well a little.

    Some people like new and if you can write of the payment it’s probably not a bad idea. If you can’t then not so much.

  • avatar
    maxxm

    @ Stephan Wilkinson:

    Now that’s some truly refreshing logic! If your example of common sense were in fact much more common, we would all be better off.

  • avatar
    psarhjinian

    Thank goodness for putting the brakes on the “fleecing” of America. All this is/was is a means for people to further get themselves into debt with the illusion of getting more for less.

    This isn’t entirely true. A car is not an asset in the sense that a house is. Houses (well, usually) appreciate or stabilize in value and anything you pay is (after the bank’s cut) your own equity; cars depreciate like mad for their entire lifetime, and start becoming a liability far sooner than that–as soon as the repair bills start coming in. Leasing lets you avoid that, which is nice if you’re not mechanically inclined.

    And then there’s taxes. On a $20,000 car, I’d pay nearly $3000 in tax on a cash or finance purchase. On a lease, I’d pay much less than that because I’m only laying tax on the lease payments instead of the whole balance. And again, I’d be dodging the repair bills that, even on a good car, will start adding up very quickly at the four or five year mark.

    Finally, I can still buy out the car, if I want. If it’s been good to me and I’ve been good to it, this is an entirely reasonable option.

    There’s certainly an environmental issue surrounding the leasing culture: you’re contributing to a throwaway culture and there’s definitely a larger net amount of energy used to produce a new car. That said, a new car is safer, cleaner and more efficient.

  • avatar
    psarhjinian

    Repairs on all the cars–including the SC–have been minimal. All you need to do is take care of ‘em and _not_ let them turn into beaters.

    My Saab and I would disagree with you. I take very good care of it, and my stack of repair bills attests to that.

    I agree that buying a sensible car is probably wiser than leasing it. Buying a less-than-sensible car, though, is asking for a shin-kicking when the warranty runs out.

  • avatar
    Nicholas Weaver

    The other thing, the leases on work trucks are less attractive. The IRS depreciation rate is S@#)(* on a $30K+ vehicle. But on a $15K vehicle, you’d do better buying and depreciating it than leasing on your taxes.

  • avatar
    mikeolan

    @StephanWilkinson – You got lucky on the Audi’s reliability- I see plenty with major issues and requiring major repairs after a few years. A few of those back-to-back can easily run you $4,000.00 – years of lease payments on some cars. ESPECIALLY on a VW product.

    Buying a used car you take a major gamble- I’ve had 4 year old cars (Domestics… GM nonetheless) that required a string of major repairs right out of the bat from purchasing them. I bought the car for next to nothing (thanks to GM’s poor resale value) , but from replacing the A/C compressor AND clutch to the water pump, the power steering system, the wheel bearings, and premature failure of the alternator. The transmission hadn’t even gone yet. By the time I dumped it (for what I’d paid for it) after 2 years I’d sunk enough to lease a new Civic- which wouldn’t have all of the aging niggles my GM had (and would’ve had a working radio.)

  • avatar
    netrun

    Awesome article! I learned a lot! As someone who has never leased/borrowed anything in his life, there are a lot of upsides to leasing I didn’t know about.

    It seems to me that the net effect of all of this will be
    1) slightly higher market share for everyone other than GM and Chrysler
    2) fewer car buyers overall.

    That second part might actually be more important: people that aren’t able to get into a subvented lease won’t be able to afford a new car and will put off buying one. This means more vehicles that will be sold will be profit makers. That’s good for the industry overall.

    @StephanWilkinson – I second mikeolan, you are one lucky guy with your 2000 Audi with little or no repairs. As someone who does all the work on his own cars (’95 E320 wagon & ’02 Rav4, thank you) I shudder at the thought of owning that model year Audi anything!

  • avatar
    Stephan Wilkinson

    Psarshinian, anecdotal tales about automotive reliability are not worth much, even my priceless ones, but I had two 99s and a 900 between the early 70s and late 90s, and they treated me very well, repairwise.

    And netrun, I do most of the work on my cars too. Can it be that I’m just endlessly lucky? We gave our daughter a brand-new Neon Sport when she turned 16–not because she’s the classic spoiled princess but because my theory was, the guy who owns the Camaro, he rides with you, not the other way around–and it was a fabulous car, never a bit of trouble for four years.

  • avatar
    1998S90

    Leases generally remain on the books of the captives, they can’t be sold into secondary markets in the form of asset-backed securities. So the captives have to fund those leases themselves.

    Borrowing costs for newly triple-C rated Chryslerberus must be high. Credit default premiums for the domestic 2.8 must be crushing.

  • avatar
    dwford

    I guess I leased my Fusion just in time! Between employee pricing, $2k cash rebate and a 60% residual, and the end of the month trade in bump, I got cheap cheap pmt. Good luck getting that now.

  • avatar
    psarhjinian

    Psarshinian, anecdotal tales about automotive reliability are not worth much, even my priceless ones, but I had two 99s and a 900 between the early 70s and late 90s, and they treated me very well, repairwise.

    Exactly. You’ve been treated well by cars you maintained, I’ve been treated badly. My preference, were I to buy another Saab (before the end of the month, that is) would be to lease for precisely that reason: it’s an enjoyable car, but it has the potential to be a liability in a way that, say, an Accord would not. I’d very much want the option to walk away from $3-4000 a year in repairs, which has been the case with my 9-3 (2002, repairs started in 2005).

    Cars are not houses. Unless you intend to keep them a long time (or neglect them shamefully), there’s a point where they cross the line into liability territory. It’s not the same point for every car, but it exists and it’s a long, long time before they start appreciating again.

    Leasing, on some cars, can help with that.

  • avatar
    ttilley

    Leasing makes sense for a certain group of automotive consumers. We won’t go into the reasons here; there are plenty of other websites that explain the benefits.

    (Ok, I hear it now, at the end of the Bimmer lease you own nothing versus having equity in your Chevy – I say, who cares? After four years, do I want a new car or keep driving my now way out of warranty [except for the drivetrain] beater?)

    These two statements seem somewhat at odds, to put it mildly…

    For the record, I want equity, though perhaps not in a Malibu.

  • avatar
    taxman100

    I’ve never even considered leasing a vehicle. If I buy a new car, I tend to keep them 10 years. If I buy a 2-3 year old used car, I keep them 6-7 years.

    Every time you make a lease or purchase transaction, there are transaction costs – sales tax, licensing fees, administrative fees, etc. Not to mention, you will never go without a car payment. Plus every 3 years you have to hassle with the bloodsuckers down at the car dealership. No thanks.

    My wife and I own an 8 year old Corolla bought new, and a 6 year old Grand Marquis bought used 3 years ago. We have not had a car payment since the summer of 2003. I can guarantee you all of our repair bills on these vehicles have not added up to even one year’s worth of lease payments. Both cars are still running like champs.

  • avatar
    npbheights

    taxman100:

    I think you probably have the most practical, longest lived cars from a domestic make and “import” make (ironically the domestic was made in Canada and the import probably in California.)

    If you choose, IMO, both of those cars should see 200,000 miles at a minimum, maybe 300,000 miles or more. Money spent per mile should be amazingly low.

    If you want some flashy european car to drive 10K miles a year, a lease seems perfect, but other than that it does not seem to make much sense for me…. especially considering I bought a new car on June 26, 2008 and it already has 2550 miles on it……

  • avatar
    wstansfi

    Sajeev,
    Problem with those BMW leases, as I found out, is that they usually exclude manual transmissions, because they’re harder to move used. That closed that option for me and my wife.

  • avatar
    nino

    Why the knock on leasing?

    Leasing is another financial tool that’s available to those that need it and can use it.

    In some cases, leasing can cost LESS than buying the exact same vehicle because of built-in manufacturer incentives.

    To those that feel superior because they buy their car and therefore “own” it, I’d suggest that if you’re financing it, you don’t own anything …..yet, until it’s paid off.

  • avatar
    folkdancer

    Thank you TTAC and all of you making posts. I have learned a great deal more about leasing.

    I hope to read more about the availability of funds to hold a lease.

  • avatar
    Bunter1

    If an automaker is saying “owning one of our fast depreciating vehicles used is a bad deal for us” what are the odds that it is a good deal for the consumer?

    Just a thought.

    Bunter

  • avatar
    guyincognito

    I would never buy a new car or lease a used car. My plan is the opposite. I find leasing new cars very attractive because I’m obsessed with cars and I want a new car practically every day and can thus only make it 2-3 years without getting one. Then I want to have a car lots of cars that I own and can do what I want with, such as race and modify

  • avatar
    cleek

    Chase Auto Finance will no longer offer leases for Chrysler Vehicles either.

  • avatar
    thetopdog

    Has it been confirmed that GMAC has stopped leasing in the US? A google search tells me that it has stopped leasing in Canada, but I have not seen anything that says GMAC has totally stopped leasing in all of North America

  • avatar
    Subifreak

    “After four years, do I want a new car or keep driving my now way out of warranty [except for the drivetrain] beater?)”

    Great write up overall. One question though… you consider a 4 year old vehicle a beater?

  • avatar
    AGR

    The electronic content/platform of modern vehicles ages at an accelerated rate compared to to the mechanical platform.

    A 4-5 year old vehicle is an electronic “beater” compared to a new vehicle…even if mechanically they are comparable.

    The fact that many electronics are proprietary to the individual manufacturers further accelerates the progression of vehicles into “electronic beaters” which become challenging and expensive to diagnose and repair.

  • avatar
    detroit1701

    One of the major problems with used cars that still have some value (say 14K and above) is that the substantially higher interest rates on used car loans can make financing a used car just as expensive as a new one. For example, I looked into getting a used 2005 Mazda3 hatch (there actually are not that many out there) — dealers were still selling them for 14K, at which point financing that over 5 years would have been just as expensive as getting a new one (lower interest rate loan, incentives).

    Driving a car under warranty also has tremendous advantages. For instance, GM has a really great certified pre-owned program that allows you to extend the warranty sometimes to 100K.

  • avatar
    Stephan Wilkinson

    AGR, that “sounds right,” since we have so much trouble with electrical components, but I don’t know that it is. I don’t think electronics “age.” If they work, they work and will continue working. there is no “wear,” unless you’re talking about electric motors.

    Correct me if I’m wrong; it’s not an area in which I have any particular expertise.

  • avatar
    AGR

    Most people have no desire to deal with electronics in vehicles, or to pay the price for repairs. Although electronics don’t age or wear,there is no forewarning of a failure. They can become inconvenient.

    The other aspect is the addition of electronic features in many vehicles…the more expensive vehicles have a higher and more complex electronic content.

    The extended warranties that are comprehensive and cover the majority of electronic componentry are priced accordingly. On a modern vehicle a powertrain warranty is not useful if it does not cover electronic components.

    A 36 month lease in most instances offers an excellent alternative to either get out of the vehicle or renew the commitment for the same vehicle. Lately a new vehicle is less money than renewing the commitment on the old vehicle, and having to purchase an extended warranty.

  • avatar
    psarhjinian

    AGR, that “sounds right,” since we have so much trouble with electrical components, but I don’t know that it is. I don’t think electronics “age.” If they work, they work and will continue working. there is no “wear,” unless you’re talking about electric motors.

    Nonmoving electronics can suffer failure, but it’s not something you can predict; unlike mechanical issues, which come with predictive traits (sounds, performance dropoffs), electronics issues are “On/Off”, and come with no warning.

    Typically, faults come from the following:
    * Corrosion: A car is a nasty environment; you get moisture eveywhere. Some manufacturers (VW) have a really bad habit of putting body computers right where water will drain and pool.

    * Electrolysis: When you pass current through devices, you can (again, if the component is badly-designed) get an buildup of electrolysis-derived scale that will, eventually, short something out. Sensors bathed in fluid will do this.

    * Heat doesn’t do any favours to silicon, plastic, ceramic, solder or wiring, and it can accelerate the #1 and #2 above. Cold and heat combined (like, say, an engine compartment in winter) are really bad for causing thermal-expansion based cracks.

    * Static discharge. Zap!

    * Vibration. The soldering (yes, I know, it’s not solder in the traditional sense) is precision work. Precision work doesn’t take well to five years of being shook about like tumbler.

    * Voltage irregularities. If your battery or alternator are supplying low, high or dirty power, that’s not healthy.

    * Tin whisker effect. Metal shavings love to collect in places where static or magnetic conditions allow. If they get long enough, they’ll bridge a circuit and Zap!

    * Software. Is. Buggy. A sensor that looks like it works in the factory might not record the right readings in certain circumstances, like every fourth Thursday, or each leap year, or when the moon is waxing gibbous. Clunk. Twang. Chug-chug-chug.

    Writing this made me realize what a minor miracle it is that cars work at all. It also reminds me that getting into an accident in a car that’s wired to the gills is guaranteeing thousands of dollars of exploratory surgery.

  • avatar
    RobertSD

    Again, this mischaracterizes what Ford and GM are doing. GMAC has ended certain leasing but kept it in other areas, just raising payments through residual adjustments or drops in subsidies. Ford has only adjusted residuals, which will, in effect, make leasing rare in the retail truck business, but hasn’t stopped anything. Ford is continuing to offer leases on all cars and CUVs.

    Just because Chrysler is ending all leases does not mean that GM and Ford are too.

    The key here, though, is how much will this impact sales. Ford and GM will find ways to serve their contractors and work fleets for their trucks separate from their retail customers. So, let’s focus on retail.

    The Expedition, Navigator, Explorer and F-series combined sold about 55,000 units in June. My best guess says that about 60% of that was retail at best (based on Ford’s recent statements). So, you have 33,000 vehicles at risk in June. Approximately 20% of Ford’s vehicles are leases, which means they are at risk of losing 6,600 units off of their June sales. Not insignificant, but not huge – about 3.5%. If the elimination of 3.5% of sales shores up your finances to provide better leases for cars/CUVs and keep your credit rating in good shape, I think it is a GREAT move. Basically, truck sales have fallen so much that people are no longer coming to the dealers looking to get a cheap lease on an Explorer. So, in reality, the total risk of lost sales is low. And of those 1,400 Explorer buyers a month who can’t find leases, it is likely that some of them will stay with Ford in an Edge or Flex, which still have leases.

    This isn’t permanent either(at least from Ford and probably not GMAC). If large vehicle residuals improve, lease rates will likely be adjusted again. This move is simply to avoid any additional write-downs. Basically, when Ford wrote-off all that lease value, they were estimating all future value into that. GMAC will do the same with their earnings. By not offering cheap leases until you have a clearer picture of residuals, you minimize the size of future write-downs in case the market deteriorates even more.

  • avatar
    Airhen

    One of the few good things that I could see about leasing a vehicle is having the nerve to get a black paint job. :)

  • avatar
    Ken Elias

    RobertSD – GM won’t admit to terminating its leasing programs but, in my estimation, will constructively do so on most vehicles with some exceptions. The simple reason goes way beyond thinking about the decline in residuals today, but mostly about the weakness in the balance sheets of the captive finance arms. Chrysler Finance is the weakest of all (mostly due to risk associated with Chrysler itself), followed by GMAC which suffers from the Rescap hangover and GM’s own issues, and lastly Ford Motor Credit as being relatively the strongest of the bunch (no mortgage exposure, Ford Auto has plenty of liquidity). The real issue is whether the captives can continue to fund leases and keep such assets on their balance sheets.

    What we will soon see is that GMAC will make leasing almost cost prohibitive or restrictive enough to crater the lease business on GM vehicles. While Mark LaNeve may claim otherwise, and GM may continue with subisidized leases for August to avoid dealer shock and anger, leasing will be constructively phased out one way or another in the US. Until the problems at GM and GMAC are solved, leasing will not return as a key marketing tool. Sure, you may still be able to lease a GM vehicle using GMAC’s now lowered standard residuals, but the payments will be ridiculously expensive.

    My bottom line is that GM is just trying to avoid more bad PR and softening the blow to the dealers. GMAC reports tomorrow and it will be not be pretty IF they take the writedowns necessary on the current lease portfolio, never mind the great unknowns about Rescap. GM itself, when it reports on Friday, will remain mired in the muck thus possibly pressuring the rating agencies to further reduce the creditworthiness of the company. Unfortunately, it’s a virtuous circle and ultimately leads to a curtailment of leasing.

  • avatar
    AGR

    That they stop leasing, and down play the effects of leasing its great optics for the rating agencies.

    They still have to deal with decisions they made in the past 3-4 years that will come due in the next 3-4 years.

    The residual losses are from vehicles leased in 2004/2005 that are coming to term now.

    Did the manufacturers forget that when you lease a vehicle you have to sell it twice, once at inception and once at termination to convert it to money.

  • avatar
    RobertSD

    @AGR

    Not accurate. The write-downs are for all outstanding vehicles on lease to Ford Credit/GMAC/etc. Further deterioration could lead to further write-downs, but my guess is that Ford tried and GM (for the amount they do book of GMAC activities) will try to overstate the issue as much as possible (leagally and financially sound) in order to write down as much as possible in one hit. That way, you don’t have to write down more in the future.

    The only way in which they deal with this for the next 3-4 years is in lower cash from the resale of vehicles as they come-off lease. But for the important part – how they account for that expected value, which drives your booked assets and hence credit score/borrowing ability – this is pretty much a done deal unless something even more drastic happens.

  • avatar
    Mirko Reinhardt

    @wstansfi
    Problem with those BMW leases, as I found out, is that they usually exclude manual transmissions, because they’re harder to move used.

    I’m on a BMW lease and I got a manual. My 1-series costs me less than a Honda Civic would have, gets better fuel economy, and if you lease a 1-series you get insurance for €20/month.
    Excluding manual transmissions on BMWs? How weird can BMWUSA be?

  • avatar
    AGR

    RobertSD,

    You are saying that they all drew a line as of August 1, accounted for the residual losses on all outstanding lease as of August 1, and are starting over with a clean slate.

  • avatar

    From the front page of today’s WSJ: “As of March 31, GMAC held $33 billion in lease assets on the books. Of that, about $14 billion is at risk of being written down as financial losses.”

  • avatar
    RobertSD

    @ AGR

    I wouldn’t call it a clean slate as their assets are getting severely reduced and borrowing power decimated. And it’s probably not as of Aug 1, but as of June 30th (could be wrong though). But, yeah, they’ve written down the whole value. They aren’t going to write-down $2 billion per quarter for three years. Ford doesn’t have that much in outstanding lease assets.

  • avatar
    billmv

    I think of leasing merely as a reversal of the financing process if you do not wish to pay all cash for a vehicle.

    In the traditional “down payment/bank loan” purchase model, first you fork over a chunk of money up front, THEN you pay off a loan over time via a series of payments. Only at that point do you get the title from the bank and really “own” the vehicle.

    In the leasing model, first you make a series of payments over time, THEN you fork over a chunk of money (the residual amount) if you want to “buy” the vehicle. Only at that point do you get the title from the lessor and really “own” the vehicle.

    Either way, a financing entity holds the title to the vehicle until the full purchase price of the vehicle is paid off, so you don’t own it until their obligation is satisfied.

    A vehicle will be worth what it’s worth at a future point in time, regardless of which of the three possible methods you chose to pay for it – cash, finance or lease. It just boils down to how you like to manage your money, and what other options you have at your disposal to make that money work for you.

    Thus, I disagree somewhat with Ken’s statement that a lease is “nothing more than a long term rental contract.” It’s a long term rental, but with an option to purchase at the end. That’s an important distinction. With traditional financing, you’ve made the decision that you want to truly “own” the vehicle up front. With a lease, you make that decision at the end of the financing period.

  • avatar
    Beelzebubba

    I wonder if the folks at Ford realize what a great opportunity has been dumped in their lap by Chrysler and GM? The domestic brand lease market literally belongs to them! They’re fools if they don’t have some top-notch marketing folks figuring out strategies to capitalize this to the fullest!

    There are a lot of companies that lease their company cars AND many of them require domestic vehicles. I’m not sure if they only require a U.S. brand name or actual location of assembly and parts content- the latter would knock the Mexican Ford Fusion/Mercury Milan off the list for some.

    This will be a great way for them to unload the poor selling Taurus/Sable twins, too! Hopefully the Fusion/Milan won’t see a huge surge in fleet sales because it’s among the best domestic cars in resale value…I’d hate to see that tank, but doubt that Ford really cares about that right now.

    I’d also be willing to bet that the sort of buyer who would lease a big SUV or full-size truck in the past is out of that market segment for good by now. The buyers who still need these kinds of vehicles realize that it’s for life- so they’ll be buying, not leasing anyway.

    I am still amazed at just how low the lease payments can be on cars like the Honda Accord, though. With $2200 due at signing, the LX-P automatic is $199/month and the EX-L V6 is a whopping $259/mo (both for 3 years). I can’t imagine a car payment below $350 per month, but I’m starting to think I need to find out! Or, even more inconceivable, what might it feel like to actually keep a car until it’s PAID OFF??? =)

  • avatar
    psarhjinian

    The domestic brand lease market literally belongs to them! They’re fools if they don’t have some top-notch marketing folks figuring out strategies to capitalize this to the fullest!

    This is the a company that couldn’t market free gold bullion. Did you witness the whole Taurus/Five Hundred/Freestyle debacle? How about the Zephyr/MKZ thing? Or the wholesale inability to sell the only hyrbid SUV that’s not hideously expensive?

    Ford, bless them, make some decent cars. They’re marketing, though, makes GM’s equivalent look like wizards by comparison.

  • avatar
    philipwitak

    re: “So the import competitors now have a choice – raise their own lease rates…or capture more market share. Hmmm.”

    i’m thinking, both.

  • avatar
    sfaktor

    I’m wondering about the value of a lease as a hedge against vastly higher oil prices. If I can get a car on lease now, then if gas goes to $7 in 2012, I can turn the car in and get a smaller car like an Aygo which should eventually be in the US? Isn’t that what’s happening now as SUVs on lease are now up from when gas was cheap? The folks who leased a few years back are in great shape as they don’t have the risk of having to sell their land barge in the land of $4 gas. They can avoid being upside down and easily transition to any car they want.

  • avatar
    healthy skeptic

    A little late to this argument, but I have to say that buying a used car off of a lease is probably going to be the way to go for me, going forward. That’s a good deal. I bought an ’01 Jetta GLX fully loaded–leather, premium stereo, heated seats, blah blah blah–back in ’04, coming off a 3-yr 30k mi lease, for the same price I could have bought a no-frills new Civic. I found the original window sticker in the Jetta’s glove box. I saved a full one-third off, and the car still runs and looks almost like new. (Yes, I’m aware VW products have a bad rep for reliability, but I’ve never had any problems myself, thankfully.)

    So the bottom line is, if you really want “more” care than you can afford–go used! Cars are so well made these days as compared to decades past that the “used” stigma doesn’t actually have much grounding in reality. This holds especially true for high quality cars like the 3-series Bimmer. Let someone else eat that high initial depreciation, then swoop in and get yourself a nice car for a good price.

  • avatar

    I hace come accross this post from 2008 and I felt compelled to comment: thank god we’re finally out of this credit crunch! There is a good article from Marketwatch that shows that manufacturers have started being quite aggressive about their leasing deals again. See: http://www.marketwatch.com/story/car-leasing-deals-shift-into-high-gear-2010-04-12


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