Winter is nearly over and the unofficial start of the spring car-buying season is already underway, when automakers roll out deep discounts and other incentives designed to lure car shoppers into showrooms.
General Motors got the ball rolling last week when the auto giant launched its version of “March Madness,” a promotion named after the annual men’s college basketball tournament. GM is offering car buyers up to $1,500 cash back per vehicle in an effort to rid itself of inventory sitting in dealer lots for at least three months.
Other big automakers are expected to roll out similar incentive programs, but some of them may fall on deaf ears. While Americans are still buying automobiles, car leasing is growing and it’s likely to be a popular way shoppers snap up a new vehicle this spring, analysts say. A confluence of factors, such as rising car loan rates and more stable pricing trends in the used automobile market, is returning automotive leasing to favor once again.
Indeed, the latest data from the Power Information Network, a division of marketing information services firm J.D. Power and Associates, show leasing for retail vehicles rose to its highest level in nearly four years earlier this year.
From December 2005 through February 2006, leases made up over 21 percent of new vehicle transactions in the United States — the highest level since April 2002, according to Power. In February, leases accounted for 23.2 percent of new vehicle transactions, up from 19.3 percent in the same month one year earlier and 15.2 percent in February 2004.
“We are not back at the highs we saw in 1997, so I think there’s still a lot of room to grow here,” said Randall McCathren, a leasing consultant at Bank Lease Consultants in Nashville, Tenn. “We have some of the same factors that pushed people toward leasing automobiles in the mid-90s coming up again — that’s higher interest rates and the residual values of vehicles increasing, which lowers your monthly payments.”
Auto leasing is becoming popular again after a period of excess in the industry according to Dave McKay, director of auto finance and insurance for J.D. Power and Associates. In the late 90s, lessors were overly aggressive with their lease programs, he said, so when all the cars came off lease a few years later they flooded the market.
“It’s the basic economics of higher supply, lower price. Leasing companies lost money and banks jumped out of the leasing market,” McKay said. “So the industry got more disciplined and now there are fewer vehicles around, so prices are going up again.”
However, McKay notes that the market may become glutted again if leasing becomes overly popular. “This mustn’t go too high,” he said. “When we get to about 25 percent of car customers using a lease to acquire a car, we’ll be close to a breaking point,” he added, noting that car companies need to judicious when offering leases. “You don’t want leases on cars that will depreciate tremendously — you have to be selective,” he said, adding that this does not necessarily apply to the luxury car segment, where leasing has always been fairly popular and vehicles tend to hold their value well over the years.
Leasing could have a salutary effect on sales for the big U.S. automakers, which are struggling to boost sales in the face of still competition from Asian rivals. Many still appear addicted to incentives and cash bonuses to lure buyers, notes Randall McCathren.
If you are selling a car and you put $4,000 on the hood to make it sell, “it tells the buyer that no one will buy the car at the asking price, so you have to add money as an incentive,” he said. Car leases are subsidized, but the consumer doesn’t realize it because it isn’t given to them in a straightforward deal, he added, and so there is less damage to brand value.
Big automakers like GM and Ford want boost flagging sales and move away from the big-rebate images they have built over years of offering generous, zero-percent interest rate deals for their vehicles. As a result, they are likely to offer more leasing deals this spring in an effort to build customer loyalty and rebuild their brand images, notes Jesse Toprak, head of industry analysis for Edmunds.com, an Internet-based resource for consumer automotive information.
“It’s good for business,” Toprak said. “Studies show that when a consumer has a lease on a car they are more likely to come back and buy from the same brand. The cars are almost always under factory warranty, so it creates a better ownership experience. And companies offer incentives for lease holders to stay in the family, as it were. Also, consumers like to change car so they can drive something with the latest technology.”
Brand loyalty, improved image is likely to push many domestic automakers toward more lease deals this spring Toprak notes. And big Asian players like Honda and Toyota are also expected to promote attractive lease deals to drive sales of new offerings like the new Toyota Camry.
Some car consumers who have never thought about leasing a car might find it fits their lifestyle well Toprak added. “If you bought a car 8 years ago and it’s still running well, this might not be a good idea,” he said. “But if over the last 12 years if you bought a new car every two years, perhaps you should be leasing because of that pattern.”
Before you sign up for a lease, it pays to evaluate your potential mileage over the leasing period to make sure you are not saddled with any onerous charges at the close of a lease, Toprak cautioned. “If you put anything more than 20,000 miles on the clock each year, leasing might end up being more expensive for you because most leases have a mileage of about 15,000, and if you go over it you have to pay a penalty. So if you know for sure will go over mileage, it’s in your interest to buy the mileage ahead of time.”
For lease buyers, there may also be an opportunity to get a good car deal. At end of lease, a lease owner has first bid on the residual value of the car they are returning, and under some circumstances may be able to negotiate that value down ,Toprak notes.
“There is a cost for leasing car company to take a car back, put it through their marketing channels and sell it,” he said. “They’d rather sell it back to you, so try to negotiate, or if you think it’s worth more than its residual value, but it and resell it for a profit.”