Cars

Car Leasing Stages a Comeback

More financing options and a dearth of trade-ins are behind the rebound.

By Jim Ostroff, Associate Editor, The Kiplinger Letter

April 6, 2010

Leasing will give carmakers and dealers something to cheer about this year. It’s bouncing back much faster than outright sales. Of the more than 12 million new cars that will be sold this year, about one-fifth will be leased. That compares with about 17% before the bottom fell out of the American auto market in 2008 and 2009. In fact, three-fifths of the total increase in new-car sales this year will come from lease transactions.

The growing popularity of leasing will be a boon, particularly for luxury brands that saw sales crater during the depths of the recession: Acura, BMW, Mercedes, Cadillac and others. Typically, half of all luxury brand cars and SUVs are leased, says Jesse Toprak, vice president for industry trends and insights with TrueCar, an automotive consultancy.

Leasing is getting a lift from two years of anemic sales of cars, SUVs and pickup trucks, which have reduced the volume of late-model trade-ins. “The effect has been to boost used vehicle prices, in turn increasing the residual value of leased vehicles,” says Toprak. Most automakers and financing companies curtailed leasing or even halted it for several months in 2009, when both new-vehicle sales and residual values went into freefall. Companies figured it was better to pull back on leasing rather than take the chance that the cars would be worth thousands of dollars less than expected at the end of a three-year lease.

Improved financing options are helping, too: Automakers’ captive-finance companies are more willing to transact more leases. Credit unions are getting into the automobile leasing business. And GMAC, the onetime General Motors captive-financing company now controlled by Uncle Sam, is ramping up leasing and lending for Chrysler vehicles.

Many businesses, especially those looking to replace aging fleet vehicles, benefit from leasing because they can write off the entire lease cost, a tax break not available with a vehicle purchase or financing. That, too, is contributing to the larger number of leases as the economy shows more signs of life.

For dealers, the resurgence of leasing means more work for service departments, too. Lessees are more likely than consumers who own cars to rely on dealers for routine servicing of their vehicles.

Moreover, an uptick in leasing typically spells stronger sales down the road. “Leasing builds brand loyalty that encourages customers to select the same make when the lease expires,” says Rebecca Lindland, an automotive analyst with IHS Global Insight, an economic consultancy.

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