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Car leasing making a comeback

To understand the comeback of new-vehicle leasing, look to two BMW dealerships in suburban Detroit.
More and more car buyers — including Leila Smith, standing next to her 2004 BMW X3 in Tallahassee, Fla. — are opting to lease cars instead of purchasing them outright.Steve Cannon / AP
/ Source: The Associated Press

To understand the comeback of new-vehicle leasing, look to two BMW dealerships in suburban Detroit.

About seven in 10 of Wayne Youngblood's customers are opting for a lease instead of a loan, far more than the past few years.

“Leasing gives you the ability to have more car for less cash going out every month,” said Youngblood, general manager of Bavarian BMW and Bavarian Motor Village.

Youngblood's experience isn't unique. Thanks to leasing offers not seen in years and rising loan rates, a growing number of Americans are choosing to lease new vehicles.

Leasing accounted for nearly 40 percent of all new-vehicle transactions six years ago but faded to half that level in the past couple of years. Many consumers simply couldn't resist the flurry of cash rebates and financing deals carmakers began to offer after the Sept. 11, 2001, terrorist attacks.

At the same time, a rash of leasing in the late 1990s had left automakers with a flood of low-mileage, off-lease vehicles, which hurt profits. Leasing promotions dwindled.

Now, however, leasing is making a comeback, as automakers are better managing their off-lease offerings and financing has become less attractive because of rising interest rates.

The average annual rate on new-vehicle loans was below 6 percent in 2003 but was over 6 percent for most of 2004, according to Tom Libby, senior director of industry analysis for the Power Information Network, an affiliate of J.D. Power and Associates.

“As interest rates go up, it makes other options more interesting and more competitive,” Libby said.

Leasing hit a 20-year high in 1999 when 37.4 percent of new-vehicle transactions were leases, said Art Spinella, president of CNW Marketing Research. Automakers were promoting leasing heavily then to improve profits; leasing levels had been as low as 9.4 percent in the mid-1980s.

The share of leased vehicles fell from 33 percent in 2001 to 23 percent in 2002. By 2003, when General Motors Corp. was offering zero-percent financing and cash rebates of up to $4,000 for new-car sales, leasing dropped to about 20 percent of the new-vehicle market — a level that has fluctuated only slightly in the past few years.

Spinella expects leases to climb to 22 percent of the new-vehicle market in 2005 and to 26 percent by 2007. The used-car market is getting stronger, so automakers can be confident that vehicles coming off leases will be sold, he said.

Spinella said manufacturers have been heavily promoting leases in recent months because it gives them more well-tended cars for dealers' certified used vehicle programs, which are profitable and increasingly popular. Certified-used vehicles are backed by a manufacturer's warranty and typically have limited mileage.

“We know (the vehicle) has been cared for at the dealer,” BMW spokesman Robert Mitchell said. “We know its history. And it's good for consumers because they tend to have a lot more faith in a certified preowned vehicle than a private vehicle sale.”

What's more, leasing is attractive for dealers because a leased vehicle counts the same as a sale. And a customer who chooses a two- or three-year lease is going to be back before someone who opts to buy a car with, say, a five-year loan.

“The average lease is 36 months, and then the customer has to make a decision,” Youngblood said. “If you buy a car, there's no real ticker going off saying it's time to get a new car.”

Still, leases can be a sore spot for automakers. Lease payments are lower than purchase payments because they're based on the purchase price minus the residual value, the amount the car can sell for when it comes off a lease.

In the past, many automakers overestimated residual values, which meant lower payments for consumers, but cars and trucks worth less than their resale values at the end of the term. The result was massive losses for automakers, banks and leasing firms.

In 2001, the industry lost $10 billion because of inflated residual value projections, Spinella said. Since then, automakers have gotten the problem under control and residual losses will probably fall to around $1 billion this year, Spinella said.

Leases may not always be the best deal for some consumers, who can wind up paying penalties for excess wear or higher mileage than the agreed-upon rate. Lessees also don't own anything when the lease term ends.

But the promise of low monthly payments is still one of the best incentives, Spinella said.

That was true for Leila Smith, a 30-year-old administrative assistant from Tallahassee, Fla. Smith used to drive a Nissan Sentra and didn't even consider going to a BMW dealership until she heard about a lease deal. After months of research, she decided to lease a 2004 BMW X3 sport utility vehicle.

Smith now pays $400 a month for her SUV. If she had bought a similarly-equipped X3, which sells for around $31,500, she'd be paying roughly $900 a month on a three-year loanaccording to BMW's Web site.

Smith plans to lease another BMW when her current deal expires.

“After three years, we get tired of a vehicle anyway,” she said. “It took us a long time to decide what we wanted to do, and it might not be right for everyone, but we haven't found a downside yet.”