By on September 25, 2013

7d4a7430404638720165ab399f429b03

While the engine behind the exceptional growth in new car sales is a hotly debated topic, leasing is proving to be an undeniable catalyst behind this year’s impressive new car sales numbers. Through June of this year, leasing accounted for 25.7 percent of new car sales, versus 22.2 percent in 2012.  A decade ago, that number stood at just 17.5 percent.

Leasing saw a big jump in 2010, up to 21.3 percent of new car transactions, a nearly 5 percent rise compared to the prior year. Since 2010, leasing has been on a steady rise. One possible factor for this was that GM and Chrysler resumed leasing in late 2009, with the full effects of this becoming clear in 2010.

On the manufacturer side, OEMs are beginning to peg residuals at a higher number so that lower lease payments are made available for consumers. One TTAC source told us that a European luxury brand has spent close to ten figures buying down residuals to offer coveted “$299/month” lease payments on a popular model. An article in Automotive News explored this practice in the mainstream segment as well

Toyota is one of the risk-takers. It introduced the redesigned 2014 Corolla with low lease payments and residual values that are higher than those of the previous model. Toyota is betting the 2014 Corolla will be worth 63 percent of the sticker price three years from now compared with 53 percent for the 2013 model.

There is risk for the auto makers who go with a high residual. If the vehicle turns out to be worth less than the residual used by the automaker, it could cost the OEM money. But by pegging the residual value higher, customers can borrow less money (since they borrow the difference between the vehicle’s cost and its expected value after the lease term), allowing for lower payments. Keeping the monthly payment low has been a crucial element of auto financing in the post recession era.

Average transaction prices for new vehicles have topped $31,000 while the prosperity of Americans has not seen proportionate increases. Census data shows that the average income for a family has fallen 8 percent since 2007, with no growth occurring in 2012. Understandably, many consumers are put in a financially precarious position when it comes to paying for a new vehicle. Used car prices have also risen to the point where buying a second-hand vehicle is no longer as attractive as it once was. In response, vehicle loan terms have gotten longer, so that consumers can keep their monthly payments manageable despite having to finance increasingly expensive vehicles. The average term for a new vehicle loan in Q2 of 2013 was 65 months. On the other hand, subprime delinquencies have remained on a downward trend and commercial banks are looking to get in on the action as securitized loans are one of the few products providing yields in an era of ZIRP.

An expansion in consumer credit has been one of the underlying themes in the growth of new car sales and auto financing in recent years, but the spike in leasing, and the emphasis on keeping payments low is worth keeping an eye on, if only as an indicator of a larger macroeconomic trend. Cars are getting more expensive and increasingly out of reach for many. But as long as there’s a way to keep it “affordable”, even if it means leasing, not buying, or incredibly long loan terms, then new car sales can keep soaring to record heights.

Get the latest TTAC e-Newsletter!

116 Comments on “Leasing Accounts For A Quarter Of New Vehicle Sales As Payments, Residuals Stay Low...”


  • avatar
    Astigmatism

    And so the seesaw continues. Abundant credit made leasing attractive in the mid-to-late aughts, meaning there were plenty of CPO cars when I bought mine in 2011, hence low used prices. Nobody had credit to buy or lease in 2010ish, meaning less CPO stock now, meaning high used prices. Three years down the road, there will be plenty of CPO stock from today’s lease deals, which I’m betting will mean lower CPO selling prices than they’re banking on.

    Which is great news for me, as I’ve got a few more years left in my TL but I really like the look of the current A6.

    • 0 avatar

      LEASING is a way to keep rich people and those with pristine credit moving from car to car. Though they pay a premium to drive a brand new model, they usually avoid depreciation- especially on the expensive German imports.

      My problem with leases is that it hides long-term reliability under the possibility a previous owner didn’t take care of it or treat it well.

      My other problem is that you have to come up with $3500 – $9000 each time you switch up cars. For the rich it’s no problem.

      One other problem is, if you lease a brand new model, and like it, you are almost forced to re-lease the refresh – or trade into something else. Most people just release

      Example: bought a redesigned E350? Well now the new 2014 is out…time to swap up.

      The regular people are financing the best used car they can get because they wanna drive rich cars. Unfortunately, the reliability problems hit around post-30,000 miles.

      • 0 avatar
        Russycle

        Avoid deprecation? The cost of depreciation is built in to the lease.

        • 0 avatar
          jrhmobile

          Actually, no it’s not.

          At best it’s a projection of what the leasing agent thinks it will be.

          At worst, it’s a finance/marketing prop used to artificially manipulate the value of the original purchase, buyback and depreciation schedule that may or may not work.

      • 0 avatar
        Sigivald

        “My problem with leases is that it hides long-term reliability under the possibility a previous owner didn’t take care of it or treat it well. ”

        Which explains all those “free maintenance” programs for the lease period, and the “certified pre-owned” programs as well…

        • 0 avatar

          Not all of the leasing companies have those programs, or those programs cost extra money the customer might not be willing to pay, or the leasee beats up on the car’s mechanical underpinnings driving over rough terrain.

          Many lease companies allow you to do your own maintenance so long as you keep records.

          • 0 avatar
            28-Cars-Later

            From what I recall some years back, ostensibly the “free maintenance” package was originally offered in order to increase the car’s value for CPO resale and at auction.

      • 0 avatar

        I find most of your statements to be incorrect. Leasing is for ANYONE with DECENT credit to get a new car every 2 – 3 years. They are paying specifically for the depreciation. Being in sales I am often discouraged by the number of people who refuse to lease, but then trade in their car after 3 – 4 years and owe much more than its worth. This is because they bought the car at a specific payment they could afford, and to get there they had to stretch the term out. Cars are damn expensive and everyone wants something nicer than they can truly afford and they depreciate. Leasing makes good sense. It’s quite rare for someone to trade in a car that is paid off which they bought new. When you roll over the negative equity you are snowballing for a time when you’ll be stuck with the vehicle until it’s paid off.

        Long-term reliability isn’t any different than any other purchase type. Frankly it would be even better if your first statement was correct as the rich have money all the time to pay for upkeep, while the poor might skip an oil change to save $30.

        You can lease a Ford with $0 down, we just build the fees into the payment. Of course you’re much better off putting money down as it lowers your payments and reduces the amount of money you’re paying interest on. In PA there is the 6% sales tax, plus a 3% leasing tax. I’m not sure if a down payment avoids the 3%, but I suspect it is and would save you that much more.

        If people choose to lease the refresh doesn’t that imply they like it? Sure companies put out incentives to stay with them, but it’s a choice. You can buy out your vehicle (at the inflated residual) if you really like the one you’re in.

        Leasing is a horrible idea to take if you are just looking for a lower payment, but if you always find yourself buying a new car every 3 years and unless you just pay cash each time, please consider leasing, for your own sake. I get paid the same either way.

        • 0 avatar
          parabellum2000

          As a buyer I agree with you. I purchase a car every 2 or 3 years, mostly because I drive between 25,000 and 35,000 miles a year.

          Until recently my strategy to avoid depreciation was to a buy a low mileage used car between 3 and 5 years old. In the good old days I could drive he wheels off and trade it for for what I owed or less (usually within $1500), then put $1500 down on the new car and repeat the process. Basically my own high mileage used car leasing process.

          For my last car I purchased a new car, after the model year ended, for a very competitive price. I put $1500 down, and unless VW TDI release value tanks, I hope to be able to repeat my process my cycle around 60,000.

          I wish high mileage leases were available, it would simplify my car buying process for people like me. I know I’m not going to keep a car for more than 2 or 3 years, I just drive way too much for lease.

      • 0 avatar

        That is why “maintenance” is included ! The company that still owns the car wants to make sure the oil gets changed. I’m sure a significant percentage of leased cars never got an oil change before they were returned at 3 years and 36k. This is also why recommended maintenance has dropped to almost nothing.

  • avatar
    arun

    “A decade ago, that number stood at just 175 percent.”

    I am no good at maths but I cannot fathom how that would be even remotely possible…. :-D

  • avatar
    afflo

    “The average term for a new vehicle loan in Q2 of 2013 was 65 months.”

    WHOA!

    Seriously, I’m shocked. Isn’t 48 mos. the “standard?” 36 if you’re trading in a vehicle? Who the !@#$ wants to still be paying for a new car five years later? To put that in perspective, you could be driving a 2008 model year car, purchased new, and STILL not have title in hand?

    Beyond that… leasing? That’s for people who habitually swap for new cars every 2-3 years. Why on earth would lease rates be going up with the economy in a weaker state and income stagnant? Shouldn’t the lease rate be lower, as people would be more inclined to keep cars for longer terms?

    • 0 avatar
      28-Cars-Later

      Loan rollover my friend for the “payment” minded people. Symptoms of a market turned on its head.

      • 0 avatar
        afflo

        Shouldn’t loan-rollover be less as people are less willing to take on debt with stagnant income?

        And again, (I added the second paragraph as an edit, and I’m betting many monitor replies by email as I do): Leasing is typically for people who habitually swap for new cars every 2-3 years. Shouldn’t the lease rate be lower, as people would be more inclined to keep cars for longer terms?

        • 0 avatar
          28-Cars-Later

          You’d think that but not in my experience. Many people are motivated by the payment only, as evidence by the extremely long loan terms being given out of late.

          My friends probably aren’t the best examples, but loan rollover was a popular option right until they started to lose their jobs in 2009. One of them is back at it, the others ones are driving beaters.

        • 0 avatar
          stuki

          If you’re getting significantly more car for taking on slightly more debt, more people are willing to do it. Which is where the supported leases that drive the $299 Bimmer bonanza come in.

          The automakers love it, since they can book higher sales, while the captive banks underwriting car leases have great leeway to claim money good as long as payments are being made, even on a 80% residual 36 month deal on a car noone would have bought cash at 30% below sticker.

          And unless cash flow completely dry up, the banks can continue to pretend everything is hunky dory, and pay bonuses based on all the “profits” made on all the loans sold. And then, when things do go pearshaped, those greedy bastards who have some savings, stemming from living within their means and driving an older car, need to have their savings confiscated by inflation and taxation, to prevent those precious and all important banks from going under and ushering in another so called “crisis.” That’s what the man on TV says, after all; in the 5 minutes he is allocated between ads for financial services firms.

    • 0 avatar
      bunkie

      Take a look at the used market (where most of the lease returns are going, by the way). I’d argue that most 2008 cars on the road are being financed one way or another. That’s where your 48 and 36 month finance contracts have gone. Combine higher vehicle costs with longer vehicle longevity and it all makes sense.

    • 0 avatar
      jmo

      Who the !@#$ wants to still be paying for a new car five years later?

      With 0% or 0.9% – why not?

      • 0 avatar
        hreardon

        I’m with jmo on this one: I’ll use OPM (other peoples’ money) any day of the week.

      • 0 avatar
        ajla

        If you qualify for 0%, you’re golden.

        It’s the people that do 14% @ 72 months on a principal equal to 90% of their annual gross income that give me indigestion.

      • 0 avatar
        onyxtape

        It’s always amazing to me the number of people on TTAC, who are otherwise quite intelligent judging by their comments, who flat-out refuse to max out a 0% (or ~0%) loan and prefer to pony up the entire balance up front with present-day cash.

        I’m on a 65-month note at 1%. The finance charges are insignificant over that period of time. It was a choice between 1% @ 36 months or @ 65 months. It’s not a choice at all.

        • 0 avatar
          Pch101

          The potential problem arises if there is a major crash that totals the car.

          You aren’t just borrowing the money, you’re also providing collateral for a lender. Statistically speaking, if you own a car for 6-7 years, the odds are very high that you’ll have some sort of crash damage. If the crash is major, then you could have an argument over who owes what to whom.

          Of course, you can insure around this risk, i.e. gap insurance, but it still creates a risk, such as a claim that can be disputed. I understand your point, but the length of the term doesn’t come without a potential price.

          • 0 avatar
            baggins

            PCH101 – overstating the “risk”

            If i have crash damage, I either take a loss or I have auto insurance in which case the loss is my deductible.

            Either way, the loss is caused by the crash, if I have title or a note on the car doesnt change the amount I lose.

            The only issue is if you dont have the funds to settle the note, after any available insurance settlement.

            If you dont have those funds, then by definition arent taking advantage of OPM to invest, instead you are buying more car than you can afford.

            I took 0.9% for 60 months on my last car Market’s up 25% since then. THe extra 20,000 I’ve had in the market has earned 4-5K vs interest of a few hundred.

          • 0 avatar
            afflo

            GAP insurance is such a scam. If you need it, you’re not putting enough down, period. You should never have a payoff amount more than the value of the car.

            But we live in an age where people trade cars with negative equity and don’t bother to even pay that down before swapping.

            At the very least, when people roll over their old car into a new loan, they should get their unused, prorated GAP refunded, but most of them don’t even do that!

          • 0 avatar
            Pch101

            “The only issue is if you dont have the funds to settle the note, after any available insurance settlement.”

            Many borrowers are upside down on their cars. That’s exactly the problem, which is noted that one would need to pay for gap insurance in order to avoid a potential hit.

            “If you dont have those funds, then by definition arent taking advantage of OPM to invest”

            That would also describe most people. They’re borrowing because they have to.

        • 0 avatar
          WheelMcCoy

          For some, it’s one more monthly hassle, and possibly a stamp. Also, at the end of the loan, there’s a $20 fee to get the title. Paying it all up front let’s them forget about all that, and possibly take the car to the track since they own it. :)

        • 0 avatar
          afflo

          I don’t presume to know your financial situation, but I most often hear this argument from those who are looking for a justification to buy more car than they could otherwise afford. I agree though, If you’re keeping/putting aside the amount of the purchase into savings or an investment instrument, then your strategy is logical and rational. It’s a gamble on future inflation rates, but most facets of life are a gamble.

          I also see the benefit of a longer term loan that you pay off more quickly – it allows you flexibility if your financial situation is less than stable, so you can vary your payment as necessary.

          For me, and for others, I’m sure, there’s a great deal of satisfaction in owning the car. I want the title in my lock box. I don’t like to fall into a mindset where a $300-400 payment is just a part of life.

          I must add: I had the misfortune of being married to someone who habitually overextended herself on loans, and dragged me into the vortex. I don’t like having debt; Given the choice between the sword of Damocles hanging over my head, contingent on paying the tyrant his monthly tribute, and owning my car outright, I’ll choose the latter.

    • 0 avatar
      hreardon

      I’ve always abided by the 60 month rule and generally paid off my cars within 48 or less.

      I think it all depends on how many miles you put on the car and how much abuse it takes. What I am surprised is that manufacturers really haven’t kept pace with their warranties as terms have grown. You’d think there would be more 5/60,000 bumper to bumpers these days, but not so.

      You would think that lease take rates would decline, but the issue is cash on hand and affordability. We are rapidly becoming a payment-based society instead of a purchase society. The ‘subscription model’ has taken root and overshadows ownership everywhere: cellular phones, cable TV, cloud-based software and hardware services, leases and increasingly: employment.

      • 0 avatar
        28-Cars-Later

        “We are rapidly becoming a payment-based society instead of a purchase society. The ‘subscription model’ has taken root and overshadows ownership everywhere”

        Spot on sir.

    • 0 avatar
      Pch101

      “Why on earth would lease rates be going up with the economy in a weaker state and income stagnant?”

      They’re being subsidized by the automakers.

      If your intent is to own a car for only 2-3 years, then leasing may be prove to be the more prudent option. I suspect that the automakers would prefer to subsidize lease residuals now and bet on the possibility that values remain high, rather than lock in a subsidized low interest rate that is sure to produce a loss.

    • 0 avatar
      deanst

      6 year (72 month) and 7 year (84 month) terms are where the new “standard” is headed.

      Shouldn’t the headline for this article reference HIGH (predicted) residuals and not LOW?

      I remember having a meeting with BMW a few years ago where they talked about getting killed on high predicted residuals, and that they had learned their lesson. Apparently not……….

    • 0 avatar
      ash78

      Your comment is fiscally sound, but a little quaint. 60 months has been “the norm” for a couple decades now, maybe more. I personally sold cars about 10 years ago and it was considered a given…unless you wanted a really old car and could only get 48 months from the bank. 72-84 mos for high-value cars.

    • 0 avatar
      sportyaccordy

      Who wants to take a depreciation beating every 3 years, considering many new cars today are just warmed over versions of previous generations? The G37 is pretty much the same car under the skin as the original G35. Corolla today has ties to the version from 10 years ago. Etc etc. Plus cars are a lot more durable. If you can deal with the boredom and equip the car right it can definitely keep you entertained for 5-6 years.

    • 0 avatar
      morbo

      When I bought my used Ranger in 2006, they offered me a 60 month loan at 8+%; I took a 36 month loan at 5%.

      When I bought my new 2011 300C, they offered me 72 months at 3%. I took 60 months at 1.99% (gotta love credit unions).

      Helping a friend buy a 2013 Accord recently, the dealer was talking up 84 month 3% financing; he went with 60 month 1.49% financing (really gotta love credit unions).

      This has the feel of a bubble. Not quite to the toxic mess of housing YET, but auto loans ‘feel’ like they’re headed that way. This won’t end well, especially for the banks that are extending out 8 year loans. I won’t be surprised if 10 year loans become available soon. Interestingly enough, the credit unions I’m familiar with, (Pentagon Fed, Navy, APG) aren’t going beyond 60 months with their offers. They must see something Ally/CapOne/TD don’t or won’t see.

      • 0 avatar
        krhodes1

        There are HUGE differences between cars and houses. The biggest one being that repossessing a house and then disposing of it is very, very hard. The process is expensive and time consuming, and the amount of money at play is much larger. Cars are easy – you send Bob the tow truck driver and grab the car, and you sell it at the next auction. And since most people need the car to get to work, they will pay their car payment before practically everything else in their life. The risks are much, much lower, and the interest rates are much higher on those riskier loans to start with.

        In my case, both BMW and FIAT beat my credit unions rates by rather a lot, but I definitely think it is smart to always go in with a loan already in hand. Might as well make them work for it, nothing to lose. FIAT even beat their own advertised rates to get the business, they did not technically have a nearly free money deal on the Abarth when I bought mine, but they got me .9% for 60 months anyway.

        • 0 avatar
          thomm

          Hell…after inflation, you come ahead with a rate like that. Good F&I department there not throwing up thier hands and working to get you a better rate to keep you in house. I always love that challenge when I am working in the box.

        • 0 avatar
          PenguinBoy

          It depends.

          I recently bought a new vehicle, and the cash price was lower than the price if taking cheap financing, so In my case it was cheaper to pay cash.

    • 0 avatar

      I take a loan for up to 5 years long as the interest is under my mortgage interest. I’d rather throw extra money at my mortgage with the higher interest rate.

  • avatar
    28-Cars-Later

    Great article DK.

  • avatar
    bunkie

    I came *this close* to leasing a 328. The numbers make it incredibly attractive. Combined with warranties that cover the car for the life of the lease, the net result is a predictable cash flow. The reason why I didn’t has more to do with wanting a wagon (which was much more expensive as a lease than the sedan) than with anything else.

  • avatar
    romanjetfighter

    Those lease specials always have so much fine print with them and extra fees and they’re always on a one-in-stock loss-leader model.

  • avatar
    ktm_525

    Are these not called subvented ? leases? When I was leasing a Volvo V70R it was obvious that the resale price at the end of the lease was going to much lower than the lease residual. I tried to make a lower offer to buyout the car but it had to go through a formal process. The dealer told me the leasing company had insured against this lower than expected value vs. residual price and that a competitive process would determine the “value”.

    Probably a load of …. I ended up buying back my car from the dealer as a CPO for a much lower price than the residual..

    • 0 avatar
      hreardon

      I would have to find it, but someone recently gave a great explanation of how BMW runs the lease game to its benefit. The short story seems to be that they need to move a lot of metal to stay competitive with the bigger boys, and one way to accomplish this is lease subsidies. Essentially what they do is sell the vehicles to BMW financial, who takes a loss when the resale falls below the residual and then corporate takes a big fat write-down on the depreciation/loss at the financial arm.

      That’s the cliff notes version. I’d love for someone with far more financial acumen to chime in and clarify.

    • 0 avatar
      Stumpaster

      Dude, that’s brilliant.

  • avatar
    jmo

    If the vehicle turns out to be worth less than the residual used by the automaker, it could cost the OEM money.

    And the leasee makes money as they have the use of the car for less than the actual depreciation.

  • avatar
    slance66

    Shopping right now and the used car inventory is terrible, with very high prices. I think that drives even more leasing. It’s a persuasive sale to show a similar payment for new vs used. Once people assume a car payment is a normal budget item, leasing makes sense for them. I’ve mostly been a cash buyer…and nobody wants to deal with us, since the dealers make the money on leases and financing.

    • 0 avatar
      mike978

      There is a lot of truth in your comments – some have accepted a car payment as a routine, never ending monthly budget item. And the dealers do make more money off those (acquisition fees, loan origination, disposal fees etc) than us cash buyers. From the buyers/lessees point of view I can see some logic – if you are spending $300 a month why not have a new or less than 3 year old car all the time. The problem is when free or very cheap money ends.

      • 0 avatar
        krhodes1

        I always find it hilarious when some on here start talking about how they expect a better deal because they can pay “cash”. To the dealer, everyone is a cash buyer – whether it comes from you, a bank, or the in-house financing arm the dealer is getting CASH. And with the in-house financing, a kick-back too.

        To me, these are unusual times. Historically the cost of money has been MUCH higher, and interest rates cannot stay this low forever. So use OPM while the getting is good. I too would be a “cash” buyer if interest rates were 8%…

  • avatar
    ajla

    I noticed that BMW, Mercedes, and Cadillac all recently raised the lease offer on the 320i, CLA, and ATS from $299 to $329.

  • avatar
    kvndoom

    If you guys are cash buyers (and I envy you), you can still game the system… The stealership will negotiate price if they think they’re gonna make it back on the back end with interest, so take the loan and then pay it off right away. A couple weeks’ worth of interest is negligible.

    • 0 avatar
      28-Cars-Later

      Take the loan on which, a new car or CPO?

    • 0 avatar
      thomm

      Yup…I set up those deals many times. All we would ask is the wait three months to do the payoff so we wouldn’t get hit by a chargeback from the lender. Never had a problem with a buyer doing that.

    • 0 avatar
      redav

      One time when I was talking with a dealership, I was told that the car maker paid the dealership for each loan they generated. (The financing company, not the dealerships, gets paid the interest on the loan, so this is how the dealership is motivated.) However, they lost their bonus if you paid off the loan in less than a few months. So, when I was offering to buy with cash, they suggested taking a small loan (just large enough to qualify for the deal), we’d split the bonus, and then I’d pay off the loan in full any time after the fourth month. The interest charges would have been much less than the price break they’d give me, and they still got their loan bonus.

  • avatar
    mfgreen40

    A friend just bought a 2013 $52000 F 150 for cash except there was a $2000 discount if he would finance through Ford. They said he would have to make payments for 6 months which is still a good deal. With all the other discounts he paid about $39000.

    • 0 avatar
      Justin Crenshaw

      I went in a couple of years ago to pay cash for a CPO BMW E92 and in order to get the “rebate” of $1,500 you had to finance with BMW. So I took a loan out for the minimum (7,000), paid the rest in cash, and then kept the loan for the minimum time (90 days) then paid it off. I guess it was worth the trouble. It would have been nice to just get the damn rebate for buying the car in the first place.

  • avatar
    ash78

    I like the idea, especially after my parents have had two successive cars that were worth more at the end of the lease term than their buyout agreement (both of which they kept). But that’s rare, and leases are RIFE with fine print and add-ons, and they see far less consumer protection action because you’re not really buying the asset.

    The whole arena is scary and full of sketchy math that I really can’t grasp (and I do bank risk analysis for a living…).

  • avatar
    ant

    This is a great post.

    When I bought a new car last year, the monthly payment on the lease quoted to me was quite attractive.

    However, I was rather skeptical about a free lunch.

    What appealed to me was that it was like taking out a loan on the scheduled 11,xxx depreciation over the 3 years, instead of the full 29,xxx of the purchase price.

    In the end though, I ended up just opting for the traditional loan for 72 months.

    The reason being is that the salesman refused to email the lease agreement so that I could read the fine print, and sleep on it. He insisted that I come down to the dealership and “go over it together”. It made me feel like he thought I was either stupid, or illiterate.

    It seemed to me that there was a lot more exposure to being ripped off at a later date with the lease, since nobody wanted me to see the contract that spells out what happens at that time.

    Maybe I was being stupid about it.

    Oh well.

    • 0 avatar
      jmo

      I think that risk is really overblown. BMW, Toyota, GM etc. would love, love, love for you to be a happy lesee who comes back for a new car every three years. They have far more incentive to treat you well and deal with your fairly than someone who buys a Civic and doesn’t come back for 15 years.

      • 0 avatar
        bunkie

        Right on the money. BMW is particularly aggressive in retaining lease customers. They offer all kinds of deals including the right to buy miles (for those over the mileage limit) at a considerable discount to the original terms as well as early lease termination.

        • 0 avatar

          BMW has amazing marketing. I bought a new 3 in 2003. I only recently stopped getting solicitations to “come drive”, or “///M Power Event”, or “compare our cars to the competition” events…
          I got to drive the full F30 line, a 335d E90 Sport Package (lust, lust), M3, MX5, and a bunch of other cars….I was sad to see the 3 has lost the thread with the F30….
          Probably the best marketing I’ve ever seen for any product.
          Sadly for BMW, my e46 is still running at 300k….and the only thing the new ones have that I don’t are better gadgets and crappy interiors.

  • avatar
    cdnsfan27

    When I was at Mercedes 80% of new vehicles were leased. MB and BMW both subsidize leases in a battle to be #1 in luxury car sales. Now that I am at Audi I see the other side, Audi is very conservative in their residuals and the vehicle is often worth considerably more than the vehicle at the end of the lease. As a result you pay higher monthly payments but it is like putting money in the bank, particularly if you go over mileage. We do however lose the pure payment buyers.

    • 0 avatar
      hreardon

      If you read through some of the Audi forums this discussion comes up quite often. The good news is: if you want to trade an Audi lease early you usually have equity. What a lot of lease buyers (Audi in particular) don’t do is upon turning the car in they also have the option of *trading* in the car. Since many Audis have conservative residuals you’d be smart to trade in the car versus simply turning it in. I know of several people who have turned a decent ‘profit’ in doing so (though the ‘profit’ usually just goes toward another lease downpayment.)

  • avatar
    Nicholas Weaver

    Having been vaguely jonesing for a new vehicle (a nice, basic, no nonsense 4×4 pickup.), the used vehicle market is really crazy right now, which makes me think the higher-than-normal residual predictions might not be so off, especially on newer models and some manufacturers.

    • 0 avatar
      jmo

      Is it crazy, or is it the new normal.

      I think there was a used car golden age in the late 80s early 90s, when people were still paying a premium to buy new based on the horrors of 1970s Detroit.

      These days, I think the market has adjusted and there really isn’t any money left on the table with a used car. I don’t see why that would change.

    • 0 avatar

      This was my observation too. Derek wrote this in the article: ” Used car prices have also risen (…)”. Perhaps Toyota are betting on inflation.

      Still, I’m not comfortable leasing and I just buy without financing. I understand that it reduces my purchasing power and I could probably lease a far more expensive car. However, I am scared of risks. I heard it was very hard to get out of a lease if anything happens.

      Healthy used vehicle prices were helping me as well as they did to carmakers who auction away the lease returns, even if I don’t have Toyota’s capability to maneuver the capital.

  • avatar
    carguy

    Used car prices are definitely up but I think Toyota is being optimistic when they assume 63% residuals for a three year old Corolla.

    • 0 avatar
      Nicholas Weaver

      I don’t. Ford’s assuming nearly 60% on a 3 year old F150 (and thats the old model). Give the new model vs old model, I dont’ think its actually that out of line, especially the price premium they can get selling as a CPO

      • 0 avatar
        28-Cars-Later

        Trucks do exceptionally well at auction and do not lose value for excessive usage the way say a commercial automobile does in the same instance (ie fleet W-impala, Panther, etc).

        • 0 avatar
          Nicholas Weaver

          These are for limited mileage leases, so the “100K miles” are not factored in.

          • 0 avatar
            28-Cars-Later

            I’ve seen trucks with those miles and higher still do rather well (for what they are). Diesels do/did especially well, in 2006 I saw a 2000 F350 do 11 and change with 354K on the clock and no service history. In 2000 that *might* have been a 40,000 truck, 5.4 topped out in the low 30s then.

  • avatar
    Russycle

    “Cars are getting more expensive yet increasingly out of reach for many.” Yet?

    • 0 avatar
      jmo

      http://blog.comerica.com/2012/09/13/auto-affordability-improves-in-second-quarter/

      We are in exactly the same place as we were in 1979, yet cars are vastly more reliable and durable. If you look at the period from 1985 to 1995 cars were much more expensive.

      Just a note – the chart (for some strange reason) is inverted – the number of weeks of income required goes up the further down the chart you go.

  • avatar
    mtymsi

    I only lease my vehicles for the simple reason I’m always driving a vehicle that is in warranty at a much lower payment than if I’d financed the same wehicle. Also, the only way the resale value comes into play is if it’s higher than my residual (lease end) value in which case I would and have made a profit. It is a complete myth to think leasing is only for high end vehicles, it is across the board.

    To me it’s a pretty simple equation, why would I want a payment at least twice as high to purchase vs. lease and have to be concerned about the resale value? The only time leasing doesn’t work out is if you’re a very high mileage driver in which case you’re either going to drive until the wheels fall off or take the hit in resale value.

    • 0 avatar
      Scoutdude

      If the resale value is higher than the residual you have not made a profit. That means you paid to much for your lease payments and if you buy it and resell it you are only recouping that overpayment.

      • 0 avatar
        mtymsi

        That’s not true, you can trade the vehicle to the dealer and make the profit, I’ve done that on three different vehicles. And the payments were not too much. One was a Mustang GT for $235/mo for 36 mos w/ zero down.

  • avatar
    mikltaz

    Lease? No thanks. At the end you do not own it. I keep my vehicles for about 10 years. I will keep saving and paying cash.

    • 0 avatar
      Hillman

      You are not the target market for this then. Some people want to have a luxury auto every 3 years and this is perfect for them. They have a built in hedge for low resale values and maintenance while being able to drive a new car. Also, luxury automakers can keep their premium image by increasing residuals to lower lease payments while being able to hold steady the cash purchase price.

  • avatar
    Prado

    Cheap money is proping up leases and car sales right now. Government manipulation of interest rates. If the federal government would stop printing money and giving it to the big financials for nothing, interest rates would be significatly higher. In other words, if the lenders had to get the cash to lend from real investors interest rates would be higher.

    • 0 avatar
      jmo

      So, you want to return to the monetary policy policies of 1930? Or maybe go old school and go back to those of The Long Depression of 1873 to 1879?

      • 0 avatar
        28-Cars-Later

        “There are numbers of us, myself included, who strongly believe that we did very well in the 1870 to 1914 period with an international gold standard.” – Alan Greenspan

        http://online.wsj.com/article/SB122273029076687929.html

        The United States actually did not return to a gold standard until 1879. However, by 1870, most of the rubble of the Civil War, including the floating “greenback” dollar, had been cleared up. Between 1870 and 1912, a period of forty-two years, industrial production in the United States rose by 682%.

        http://www.forbes.com/sites/nathanlewis/2013/04/11/the-correlation-between-the-gold-standard-and-stupendous-growth-is-clear/

        • 0 avatar
          aristurtle

          Yes, the industrial revolution happened during that stretch of time.

          In other news, an increase in the sales of hot cocoa is strongly correlated with a sharp decrease in muggings.

          edit: why is it that the people who are so quick to (correctly) point out that Clinton’s economy did well due to the dot-com boom and not due to his economic policies make the exact opposite argument about the late 19th century?

        • 0 avatar
          Pch101

          This reminds me of why Forbes is an exceptionally poor source of information.

          Computer processing speeds have leaped since the US dumped the gold standard. That correlation is equally noteworthy, i.e. it isn’t.

  • avatar
    Big Al from Oz

    Will this eventually lead to a mountain of low life second hand vehicles and flood the market with cheap used cars?

    How many will pay out the residuals and keep the cars?

    • 0 avatar
      SCE to AUX

      You ask a great question.

      I have 2 years left on the 3-year lease of my 2012 Leaf. The residual is quite high, and I know Nissan will take a bath on it if I walk after the lease is up.

      If I still love the car, I’ll see if they want to substantially reduce the buyout price. Given the weak prices in the used EV market, I think I’ll have some leverage – although it will be tough to sell the car to anyone but Nissan.

  • avatar
    Ryoku75

    Theres a few standard features that BMW forgot to mention:

    1. A name that features an X, i, or the number 3.

    2. You can have one of their cars in any color, as long as its something drabby.

    3. That you’ll never be able to say the full title of your BMW in a casual conversation, hense the pfrase “Beemer”.

  • avatar
    AMC_CJ

    I won’t lease a payment, which if I did, it means I could be driving around in a crappy base model BMW for $100/month cheaper then my base model V6 Mustang…..

    Here is our model, it work for us. We bought the car on a 5 year loan. It’ll probably be paid off in 58-60 months, not early. The interest rate was 3.9% which isn’t terrible.

    We drive crappy cars everyday. The Mustang sits in a garage. Once it is paid off, it might have 50,000miles on it, which should guarantee at least 5 more years out of it, payment free. Since the car is kept up, as said in the garage, it won’t look like crap in 5 years, nor probably ten.

    Once it’s paid off I need to make a decision on my 06 Liberty. Either refurbish it, or replace it. It’ll have a smidge over 100k at that point. Once again, it doesn’t get driven daily.

    This either leads me two nicer newer cars in our household, or a car payment 5/10 years. Which when broken down over a long term, is far cheaper than leasing.

    The biggest key here is to NOT buy a new car, finance it, then run it into the ground before it’s paid off. Of course, that means you’re commuting to work in some old beater 5 days a week, but I think it’s worth it; others think its nuts.

    • 0 avatar
      George Herbert

      Are you buying cars as investments, or tools, or entertainment?

      I, personally, buy cars because I want to drive them, and prioritize driving fun (even though most of my driving is relatively dull commutes).

      • 0 avatar
        AMC_CJ

        Definitely not as investments…

        Drive them to use, but I don’t see the point in buying a nice new car then driving it into the ground. Save nice cars for trips out of town or for nice drives and run the beaters into the ground during the dull commutes.

        • 0 avatar
          George Herbert

          The point in buying a nice new car and then driving it into the ground is that the nice new car may offer better total happyness or value than a used car purchased at the same time. The key is, not buying a new car and then getting rid of it after depreciation has bitten hard.

          You can maximize lifetime happy by buying another new car every few years, but that is economically pretty hard. The key is, every time you reach “I need another car now”, what will make you most happy going forwards? If life situation is “Can’t afford new” then get the funnest used you can afford; if you see a new car you can afford and you think you’ll enjoy driving for 15 years, buy it.

    • 0 avatar
      baggins

      this doenst make much sense to me. How many cars do you have? How many miles a year do you drive? What is the point of having a car sitting in the garage getting older while you drive a shitbox to work. If you are willing to drive a shitbox to work, then just do that and dont tie up a bunch of money on a car to sit in the garage, insure, register, maintain etc.

      I think you are spending more money and getting less utility than you could, unless you get satisfaction from having the car in the garage, which you in fact may get.

    • 0 avatar
      JuniperBug

      I think it’s nuts to be paying depreciation, interest, insurance and registration on a new car you barely use. At that point you may as well not buy the car, put those payments in an account, and buy the car free and clear once you have the money saved up, or for additional savings, buy the equivalent car, lightly used.

      Personally, I have my car mostly for entertainment. I live in a traffic-dense city with terrible roads and winters that will destroy a new car within ten years, and cheap, accessible public transit. I buy a monthly bus/metro pass for $75, and have a nearly-fully-depreciated, low-maintenance convertible with upgraded suspension, which has never seen a winter, in the garage. My car is worth less than most of my peers’, brings me more enjoyment, and will likely still be nice 5 years from now, assuming I don’t slam it into something at the track, at which point it’ll likely be worth about $3,000 less than what I paid for it 3 years ago. In the meantime, full coverage insurance also costs me well under half of that of a new car.

      Of course my scenario doesn’t work for everyone, but for me, I see no point in spending hundreds a month just to be stuck in traffic and stressing. The fact that I only physically travel to work on average 5-6 times per month certainly factors into my choice, but I was doing the same thing with a motorcycle when I was a 9-5er, too.

  • avatar
    genuineleather

    Earlier this year, my grandfather leased a 750LI with a list price of $105k; BMW pegged the three-year, 45k mile residual at $58k. This meant a monthly payment some $300/mth LESS than his previous LS460L, which is $20k cheaper to buy.

    It’s a complete fantasy, of course; off-lease Siebners rarely go for more than $50k, and most go out the door in the mid-40′s. I’m not crying for BMW (they still got their $30k 7-series premium), but it’s a perfect example of how subsidized leases distort the market.

  • avatar
    jim brewer

    Before the economy went to hell in a hand-basket off-lease luxury cars were quite the bargain. I bought a 6yr old BMW 750 il for only $11,500. As I recall Jaguars were available for around $18K. People with those kinds of pretentions wouldn’t be caught dead in cars that old.

    When my BMW was totaled in a minor accident 5 years later it had only depreciated 4K or so. Let’s hope those days come back.

    • 0 avatar
      2012JKU

      The big problem with those vehicles is you need to factor in an extra $10k in the bank for costly out of warranty repairs and maintenance. This especially applies on the BMW 7 series, Mercedes S class or any Jaguar/Land Rover product.

  • avatar
    CompWizrd

    I wish Canada got these leasing rates. I’m paying ~$285 a month for 48 months for my ’10 Fit Sport, and that was after putting 3800 down. They were doing 4.9% finance and 5.9% lease so I wasn’t losing a whole lot by leasing.

    13% sales tax doesn’t help either, a Fit Sport runs about 24k out the door.

    • 0 avatar
      CompWizrd

      A base 2013 328i sedan with heated steering wheel is $977 a month for 24 months (couldn’t find a 27) at 1.9% interest here, with taxes and freight and nothing down, 1792 due on delivery. Residual 29,264, on a 52k car.

      How much of a down payment were they asking on that 2011???

      Oh, and it starts out offering only lease, i have to click to finance, and even then it starts with “owners choice” (X month payments, X+Y months financing, Big Z due on finish). $2,134 a month to finance for 24 months.

      It’s only $3k a month to lease that nice 750xi… plus tax.

  • avatar
    JJ

    But wait…Does this mean 75% of new cars sold are paif in cash in the US? Or is this figure just personal leases and excludes company leases…

    If 75% are paid in full up front that amazes me as someone from the old continent, I would have guessed a way bigger percentage of ‘mericans leased cars.

  • avatar
    JJ

    Oh after reading Compizrd’s comment I guess I missed the point on my previous comment (that hasn’t shown up yet): you regard leasing and financing as seperate things…My bad.

  • avatar
    Justin Crenshaw

    There is something to be said for the “subscriber” service you’re getting with a lease. If you want to make a pure financial case out of it, then no, there is not a comparison to buying a car and keeping it for 7-8 years. However, what you do get is a new car, under warranty and in some cases free maintenance. Then when you turn it in there is no depreciation to worry about (it’s not your problem). There are no hidden costs or surprises; you know upfront what your outlay will be. For people with good credit you can get out the door with just the first month’s payment in many cases.
    To those people who got screwed on excess mileage charges-your fault, it was clearly spelled out in the contract, as was what type of damage charges would be assessed.
    I enjoy leasing my one daily driver for those reasons. I have four older BMWs, and with just preventative maintenance they require a lot of time in the shop. I’ve driven older BMWs as daily’s, and I’m tired of working on the damn car all the time. I want one of them to start, run, and be guaranteed with a warranty. Factor in that I’m a gearhead and I enjoy sampling different types of cars (which means I’m probably not keeping any car past the loan payoff), then leasing makes sense. I’m sorry, I don’t want to drive some boring $hitbox for 8 years!
    The fact of the matter is leasing is right for some, wrong for others and trying to convince the other side of your argument isn’t going to pan out any better than (insert political argument here).

  • avatar
    baggins

    sales rax is One important factor in california that makes leasing attractive.

    1) you only pay tax on the sum of your lease payments vs the entire car if you buy
    2) california doenst give you a credit against sales tax on a new car when you trade in an old one.
    3) sales tax is 9%+ depending on county

    If you are buying a car in calif, you need to plan to keep for 5+ years to amortize that hefty sales tax.

  • avatar
    Big Al from Oz

    “This has the feel of a bubble. Not quite to the toxic mess of housing YET, but auto loans ‘feel’ like they’re headed that way. This won’t end well, especially for the banks that are extending out 8 year loans.”

    The US automotive industry is not anywhere near a bubble.

    Since the GFC the US auto industry has sold less, much less. The population has also increased by 5-6 million people.

    I would think the US has the capacity to sell millions more vehicles before a bubble situation arises. This is on top of existing annual sales. What is the vehicle sales shortfall over the past 6 years? 12-15 million?

    Even right now I hear how great the industry is going, but it still hasn’t reached the level of pre GFC vehicle sales.

    Even another couple of million vehicle sales a year can be ongoing for quite some time.

    There must still be quite a few potential customers out there.

    All of the above is reliant on the US economy picking up, that still has a long way to go.

  • avatar
    Stumpaster

    I call BS on these percentages … For any German or Indian or Chinese owned brand. I think the lease rate for those is more like 75 percent. It costs $150 to roll back the odometer in about 5 minutes. These cars are so insanely complex, no car person would buy them and have the maintenance headache.

  • avatar
    thornmark

    I believe Ford has done the same thing as Toyota, with the Fusion at least. Just as Toyota is pushing the Corolla into Civic territory, Ford appears to have dramatically raised Fusion residuals in the face of historical valuation, up in Accord territory.

    ALG isn’t buying it:
    https://www.alg.com/insights/depreciation-ratings/

    Btw, I’m shocked to see the abysmal rating for the Volt.

  • avatar
    That guy

    I won’t be surprised if/when used car values tank in the very near future due to all these new leases being turned in. That’s why leasing isn’t such a bad deal right now. With these low payments, you’ll get a good car for low money with absolutely no risk. If used car values remain high at the end of your lease, lease again. If used car values tank, go get yourself a steal on a CPO.

  • avatar
    ixim

    Those low monthlies ignore the often hefty upfront costs – down payments, bank and “acquisition” fees, disposal back-end fees, etc. which raise the real payment by a lot. Plus, upfront cash is lost should you total the car, gap insurance notwithstanding. I get the criicism – that lessees are overpaying. That’s why only heavily subsidized leases – uncommon these days – are worth signing.


Back to TopLeave a Reply

You must be logged in to post a comment.

Subscribe without commenting

Recent Comments

New Car Research

Get a Free Dealer Quote

Staff

  • Authors

  • Brendan McAleer, Canada
  • Marcelo De Vasconcellos, Brazil
  • Matthias Gasnier, Australia
  • Tycho de Feyter, China
  • W. Christian 'Mental' Ward, Abu Dhabi
  • Mark Stevenson, Canada
  • Faisal Ali Khan, India